Chapter 4

Question 1

What is desired national savings?

Answer 1

Sd = Y - Cd - G

Question 2

What is MPC?

Answer 2

The fraction of additional current income consumed during a given period

Question 3

What is the wealth effect?

Answer 3

Wealth↑ - C↑ - S↓

Question 4

What is the Real Interest Rate?

Answer 4

Price of borrowing or lending.
r = i - π

Question 5

What are the 2 effects of an increase in the Real Interest Rate?

Answer 5

Substitution Effect:
S↑ because opportunity cost of borrowing is higher
Income Effect:
For Saver - S↓ because it takes less to reach goal
For Borrower - S↑ because Wealth↓

Question 6

What is the real expected after-tax interest rate?

Answer 6

r = (1 - t) i - π
t = tax rate

Question 7

What is the effect of an increase in expected future income on savings?

Answer 7

C↑ - S↓ - Borrowing↑

Question 8

What are the effects of Government Purchases on savings?

Answer 8

G↑ - T↑ - C↓ - S↓
Since ΔG > ΔC → S↓

Question 9

What is Ricardian Equivalence?

Answer 9

Tax change only affects the timing of taxes.
If T↑↓ today - T↑ later, so there is no change in consumption
Only true if there is no change in G

Question 10

How does an increase in Y affect S?

Answer 10

Y↑ - S↑

Question 11

How does an increase in expected future output affect S?

Answer 11

Expected Future Output↑ - S↓

Question 12

How does an increase in wealth affect S?

Answer 12

Wealth↑ - S↓

Question 13

How does an increase in expected real interest rate affect S?

Answer 13

r↑ - S↑

Question 14

How does an increase in G affect S?

Answer 14

G↑ - S↓

Question 15

How does an increase in T affect S?

Answer 15

T↑ - S↑
depends on Ricardian Equivalence

Question 16

What is the user cost of capital?

Answer 16

uc = rp + dp
rp = real interest cost of capital
dp = depreciation

Question 17

What is the desired capital stock?

Answer 17

When the MPK = uc
MPK = Marginal Price of Capital

Question 18

What is the shape of the MPK curve?
What is the shape of the UC curve?

Answer 18

MPK = Downward Sloping
UC = Horizontal

Question 19

How does a fall in r affect the desired capital stock?

Answer 19

r↓ - uc↓ - Desired Capital Stock↑

Question 20

How does a technological advance affect the DCS?

Answer 20

Tech Advance - MPK↑ - DCS↑

Question 21

How do taxes affect the MPK?

Answer 21

MPK = uc/(1-t)
Also called the tax adjusted user cost

Question 22

What does net investment =

Answer 22

The change in capital stock

Question 23

What are the 2 parts of investment?

Answer 23

Desired net increase in the capital stock over the year
(K* - Kt)
Investment needed to replace depreciated capital
(dKt)

Question 24

What is Tobin’s q?

Answer 24

q = capital’s market value/replacement cost
if q < 1, don’t invest
if q > 1, invest

Question 25

What is the goods market equilibrium?

Answer 25

The real interest rate brings the market into equilibrium
Y = Cd + Id + G
Cd = Desired Consumption
Id = Desired Investment

Question 26

What is the good market?

Answer 26

The relationship between the desired national saving or desired investment and the real interest rate

Question 27

What 5 things shift the savings curve right?

Answer 27

Rise in current output
Fall in expected future output
Fall in wealth
Fall in G
Rise in taxes (unless Ricardian equivalence)

Question 28

What shifts the investment curve right?

Answer 28

A fall in the effective tax rate
A rise in expected future MPK