(a)
To explain:
Whether an increase in the interest rate will cause decrease in consumption.
Answer to Problem 1P
The increase in interest rate will decrease the consumption power in the economy.
Explanation of Solution
An increase in the interest rate increases the monthly payments made to buy automobiles, furniture as the consumer has to pay high instalment for goods bought on credit. As the disposable income of an individual remains the same and the interest rate is high, it leads to reduction in the consumption of goods and services.
Consumption:
It refers to the goods and services that are consumed by the people in an economy.
Interest rate:
It is the rate at which the principal amount is charged for a specific time period. An amount is charged at this rate from the lender for the use of assets.
(b)
To explain:
Whether an increase in the value of stock market portfolio will cause decrease in consumption.
Answer to Problem 1P
An increase in the value of the stock market of the portfolio, will increase the consumption.
Explanation of Solution
The change in the consumption is shown below:
In the above figure,x-axis represents disposable income while the y-axis represents the consumption expenditure. The larger the amount of real wealth (including stock portfolio, property) larger will be the consumption power.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Stock market portfolio:
It refers to the numberof financial assets that is kept by an investor in the form of bonds, commodities, and mutual funds.
(c)
To explain:
Whether a decrease in disposable income will cause decrease in consumption.
Answer to Problem 1P
The reduction in disposable income will decrease the consumption.
Explanation of Solution
The decrease in disposable income will lead to decrease in consumption, as it is the remaining amount after filling income tax that can be used by an individual for consuming goods and services. If the disposable income decreases, it will have a direct impact on the consumption power of an individual.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Disposable income:
It refers to that amount of income which is available in the household for savings as well as spending after income taxes.
(d)
To explain:
Whether an increase in income taxes will cause decrease in consumption.
Answer to Problem 1P
An increase in income taxes will decrease consumption.
Explanation of Solution
An increase in income taxes will decrease the amount of income left for consumption. As less amount is left with an individual, it will decrease the spending.
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Income Tax:
It refers to the tax levied by the government of a country on an individual's business. It acts as a source of revenue for the government. This amount is used in providing facilities to the citizens of the country.
(e)
To explain:
Whether deflation will cause decrease in consumption.
Answer to Problem 1P
The deflation will cause an increase in consumption.
Explanation of Solution
The disposable income of a household remains the same but due to deflation, it will increase the value of the currency, which will, in turn, lead to an increase in the
Consumption:
It refers to the goods and services that are consumed by people in the economy.
Deflation:
It refers to the fall in the prices of goods and services in an economy due to fall in inflation. The deflation leads to an increase in the purchasing power of the currency.
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Chapter 23 Solutions
EXPLORING ECON.-W/ACCESS (LL) >CUSTOM<
- Click on the link to study the Economics in the News. Then answer the following questions. 120- 118- 3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in 2016 and 2017 that brought the economy to its situation in mid-2017. The graph shows the U.S. economy in the second quarter of 2016. Draw and label the long-run aggregate supply curve in 2017. Draw and label the aggregate demand curve in 2017. Draw a point at the short-run macroeconomic equilibrium in the second quarter of 2017. 116- 114- ☑--- Price level (GDP deflator, 2009=100) LAS 16 112- 110- 108- 106- 104- 102- $16.7 100- 16.6 16.7 16.8 16.9 17.0 SAS 16 = SAS17 AD 16 17.1 17.2 17.3 Real GDP (trillions of 2009 dollars) >>> Draw only the objects specified in the question. LV ☑arrow_forwardPrice level (GDP deflator, 2009=100) Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence The U.S. Federal Reserve raised interest rates on Wednesday. The rate rise was the second in three months. This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These gains are accompanied by a rising inflation rate. 140- 130- Source: Reuters, March 15, 2017 Describe the process by which the Fed's action reported in the news clip flows through the economy. 120- ... 110- LAS SAS → ☑ When the Fed raises the interest rate, A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls B. aggregate demand increases and real GDP increases C. aggregate demand decreases and the price level falls D. short-run aggregate supply increases and the price level falls The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve. Draw the AD curve to illustrate the state of the economy…arrow_forwardPrice level (GDP deflator, 2009=100) Millennials Are Starting to Spend More Millennials, who spend an average of $85 a day, are expected to spend at a higher rate in the next fifteen years. Only 37 percent of Americans report higher spending today than a year ago, while 42 percent of millennials say they are spending more. Millennials are spending more on rent or mortgages and leisure activities than they were spending a year ago. 140- 130- Source: Business Journal, May 25, 2016 120- Describe the macroeconomic equilibrium after the change in spending by millennials. If the economy had been at a below full-employment equilibrium, then the economy will A. move to an above full-employment equilibrium with real GDP less than potential GDP B. move to a full-employment equilibrium as short-run aggregate supply increases at the same time 'C. move to a full-employment equilibrium and equilibrium real GDP equals potential GDP D. remain stuck in a below full-employment equilibrium If the economy…arrow_forward
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- Consider the table on the right, which shows the various revenue concepts for a perfectly competitive firm. Suppose the firm faces a constant market price of $4. Compute first total revenue for each level of output and fill in the TR column of the table. Next, compute marginal revenue for each level of output and fill in the MR column of the table. (Marginal revenue at each level of output is computed using total revenue for two successive levels of output. For example, marginal revenue at 160 uses total revenue for output levels 120 and 160.) Total Marginal Price (p)Quantity (Q) Revenue (TR)Revenue (MR) $4 A EA 120 $4 160 $4 200 $4 240 $4 280 $ EA EA EA 10 S คarrow_forwardThis week we will be discussing measures of economic well-being. Read the following short article from the Office of National Statistics from the U.K. which discusses different measures of economic well-being: https://blog.ons.gov.uk/2017/07/06/beyond-gdp-measuring-the-economic-well-being-of-individuals/ For this assignment, we will narrow down to the economic well-being of the St. Louis region (or another region you choose). As the article indicates there are different measures of well-being. You are interested in creating a Hypothesis Test about the economic well-being of the area. Discuss the following issues: First, think about your research hypothesis and justify it briefly. Remember, a hypothesis is a well-thought and untested proposition. What is the null hypothesis? What is the parameter you are interested in? (i.e., the measure of well-being). Is it going to be a Lower-Tail, Upper-Tail or Two-Tailed test? What is the data that you need and how will you collect the data? What…arrow_forwardJohnny brought $39.50 to the art supply store. He bought a brush, a sketchbook, and a paint set. The brush was 1 6 as much as the sketchbook, and the sketchbook cost 3 4 the cost of the paint set. Johnny had $2.00 left over after buying these items.arrow_forward
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