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Consider a given increase in government spending financed by new debt so that taxes do not change. In the long run (using our neoclassical model),

a) The ___________ sensitive investment demand is to changes in the real interest rate, the _____________ the investment demand schedule. (more/less, steeper/flatter)

b) The ____________ sensitive private savings is to changes in the real interest rate, the ______________ the national savings schedule. (more/less, steeper/flatter)

c) An increase in G financed by new debt will cause the least amount of crowding out if the interest-rate elasticity (sensitivity) of investment demand is __________ and the interest-rate elasticity (sensitivity) of private savings is _____________. (high/low, high/low)

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

True or False Questions:

1. Recessionary Expenditure Gap- Aggregate expenditures by which aggregate expenditures at the full employment GDP falls short of those required to achieve full employment GDP.

2. Private Closed Economy- An economy that includes consumer, business, and government segments of the economy.

3. Lump-sum taxes- A tax of a constant amount so the government obtains the same amount of tax at each level of GDP.

4. Aggregate Supply schedule- A relationship between a nation's price level and the amount of real domestic output that is produced.

5. Real Rate of Interest effect- The Nominal Rate of Interest earned on a project.

6. Savings- savings are planned investments by the consumer.

7. Wealth effect- The dollar amount of all the assets owned minus the dollar amount of all the liabilities or debt.

8. Savings Schedule - GDP less investment = savings

9. Aggregate Demand Schedule- a schedule that shows the amount of a nation's output (real GDP) that buyers desire to purchase at each price level.

10. Productivity- The measure of the level of the nation of real output and the amount of resources used to produce the output, less labor cost.

11. Multiplier effect- Measures the change in GDP to spending.

12. Injection- Investment by private business into the economy for capital goods is and injection into the economy.

13. Consumption schedule- The measurement of Disposable income less savings.

27.Individuals with low incomes probably

a. pay no Social Security tax

b. pay more Social Security tax than income tax

c. pay less Social Security tax than personal income tax

d. pay no taxes at all

e. are avoiding most of their tax payments

28. Which of the following is true?

a. The federal budget deficit is a flow and so is the national debt.

b. The national debt is both a stock and a flow.

c. The federal budget deficit is a stock and the national debt is a flow.

d. The federal budget deficit is a flow and the national debt is a stock.

e. The federal budget deficit is stock and so is the national debt.

30. When the U.S. government runs a deficit, it usually does the following:

a. it buys government bonds from the public

b. it asks the Treasury Department to print money to pay for the deficit

c. it sells new government bonds to the public

d. it borrows money directly from the Federal Reserve

e. it asks the Federal Reserve to print money to pay for the deficit

32. Under what condition can the U.S. government continue to pay interest on a rising debt without eventually needing to increase the average tax rate?

a. if the national debt grows at the same rate as nominal GDP

b. if the nominal interest on the national debt grows faster than nominal GDP

c. if the total interest payments on the national debt grow faster than nominal GDP

d. if the national debt grows faster than nominal GDP

e. if the real interest on the national debt grows faster than real GDP

34.The national debt

a. will be zero when the federal budget is balanced.

b. has been shrinking in the last 30 years.

c. is equal to the government’s budget deficit.

d. can grow without negative economic effects.

36.In the long run,

a. an increase in the federal budget deficit can lower the interest rate and investment spending.

b. an increase in the federal budget deficit can raise the interest rate and investment spending.

c. a decrease in the federal budget deficit can lower the interest rate and raise investment spending.

d. a decrease in the federal budget deficit can raise the interest rate and lower investment spending.

44. If the Fed conducts open market purchases (of bonds), we should expect to see the money supply

a. decrease, the interest rate increase, autonomous consumption decrease, business investment decrease, and real GDP decrease

b. increase, the interest rate decrease, autonomous consumption decrease, business investment decrease, and real GDP decrease

c. increase, the interest rate decrease, autonomous consumption increase, business investment increase, and real GDP increase

d. decrease, the interest rate decrease, autonomous consumption increase, business investment increase, and real GDP decrease

e. decrease, the interest rate increase, autonomous consumption increase, business investment increase, and real GDP increase

48. In the classical model the interest rate is determined in the money market; in the short-run macro model, the interest rate is determined in the market for loanable funds.

a. true

b. false

You are working at an investment firm that has many investments in Lithuania. You have been asked to do a simple simulation showing the potential effects of Lithuania building a high-speed rail network, and what will happen if there is worldwide pressure on interest rates. All amounts are in millions of Litas. (The Lita is the Lithuanian currency. For this example use the exchange rate you compute, not the actual exchange rate). Government spending is projected to rise by 50 percent due to construction of the high-speed rail network

This is the status quo scenario

Total Output is equal to 5,000

Government spending is equal to 1,000

Tax revenue is equal to 1,000

Consumption is equal to 250+0.75*(Y-T);

The level of investment is 1,000-50r;

Net Exports are 500-500?,

the world real interest rate is five percent Assume that there are three political parties in Lithuania and each think that building the high speed rail network will have different effects on the economy. They have hired you as a consultant (moonlighting from your investment firm) to do an analysis showing what happens if their beliefs end up being true

a. THE LIBERAL PARTY believes that increasing government spending to build the high speed rail network will increase both G and GDP. That is G, will increase to 1,500 and GDP will increase by 500 too. Compare what happens to the economy (relative to the status quo) if the Liberal party is correct. How do private savings, public savings, national savings, investment, net exports, and the exchange rate change from the status quo?

b. THE CONSERVATIVE PARTY believes that building a high speed rail network will put people to work (thus increasing G), but that it will ultimately be useless (there will be no overall wealth created), so GDP will be unchanged. The conservatives are also concerned that the government taking on new debt will be a bad sign to Lithuania�s creditors, and that borrowing the money for the high-speed rail system will cause the interest rate to rise 20 percent. Under this scenario, how do private savings, public savings, national savings, investment, net exports, and the exchange rate change from the status quo?

c. THE LIBERTARIAN PARTY believes that taking tax money and using it to build a high-speed rail network does nothing more than take money from one group of people (taxpayers) and give it to another group of people (the construction industry) and that there is no productive economic impact. How do private savings, public savings, national savings, Net exports, and the exchange rate change from the status quo?

d. Please compare situations a, b, and c. Who do you think is correct, and why?

e. The Libertarians use a microeconomics explanation about taxation to argue that the economy will be helped most by simply reducing taxes, even if people only save the money that they don�t spend on taxes (C is not affected). They say that this phenomenon is assumed away by most macro-economists. What are they referring to?

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