Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 24, Problem 1.5P
To determine
Evaluating the statement.
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Economists often argue that a large increase in government purchases – such as for the military – will crowd out private-sector spending. Use the investment-saving diagram to defend or to refute their premise.
Economists in Funlandia, which has a closed economy, have collected the following information about the economy for a particular year:
Y = 11,500
C = 7,000
T = 1,300
G = 1,900
The economists also estimate that the investment function is:
I 3,200 - 100r
where r is the country's real interest rate, expressed as a percentage.
Complete the following table by calculating private saving, public saving, national saving, investment, and the equilibrium real interest rate.
Component
Private Saving
Public Saving
National Saving
Investment
Equilibrium Real Interest Rate
Amount
Suppose government provides tax rebate to small business on their business-related expenditure. Assuming no change in government budgetary position, this policy is likely to have a positive effect on household (or private) saving in the economy (Hint: think about the effect of this policy in Loanable Funds Market)
Is this statement true, false or uncertain? Please provide your explaination.
Chapter 24 Solutions
Principles of Economics (12th Edition)
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- US Real GDP fell by 9 percent during the 2nd quarter of 2020. Real investment spending fell by 16.9 percent during Q2 of 2020, and investment spending makes up about 20 percent of GDP. How much did the decline in investment spending contribute to the decline in real GDP in the US during Q2 of 2020?arrow_forwardWhat is the meaning of "animal spirits"? How do these relate to planned investment spending and to unplanned investment spending?arrow_forwardEconomists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000; C = 6,000; T = 1,500; G = 1,700. The economists also estimate that the investment function is: I =3,300 –100r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium real interest ratearrow_forward
- Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000 C = 6,000 T = 1,500 G = 1,700 The economists also estimate that the investment function is: I = 3,300 – 100 r, Where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.arrow_forwardIn a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving? Explain with equations.arrow_forwardScenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget which national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to the level of investment spending.arrow_forward
- Calculate investment expenditure from the following data about an economy which in equilibrium: National income =$1000 Marginal propensity to save=$0.25 Autonomous consumption expenditure=$200arrow_forwardSuppose the economy goes into a recession and private households wish to save more while businesses wish to invest less. Suppose that at the same time Congress wishes to 'get its fiscal house in order' and balance the federal budget. (Assume there is no foreign trade.) According to the lectures, which of the following is not possible. Households (in the aggregate) successfully save more than intended investment while the federal government successfully balances the budget. Increased leakages through savings and taxes, compounded by decreased government and investment spending, create a 'paradox of thrift' situation The government successfully balances the budget O Congress is surprised that higher taxes and lower outlays actually increased the federal deficit The private sector runs a 'surplus', saving more than it investsarrow_forwardProblem Set 4: Saving and Investment Economists in Fantasialand, a closed economy, have collected the following information about the economy for a particular year: Y = 9000; C = 6000; T = 1500; G = 1700. The economists also estimate that the investment function is: I = 3300 - 100r, where r is the country’s real interest rate, expressed as a percentage (i.e. r = 1 means interest rate is one percent). Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.arrow_forward
- Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.arrow_forwardAssume a closed economy in which, there is no government. If autonomous consumption is80, autonomous investment is 70, and marginal propensity to save is 0.25 in this economy.Then calculate the amount of equilibrium output (income)?arrow_forwardwhat is the correct answer?arrow_forward
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