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Chapter 4 1)Use the concepts of income effect and substitution effect to explain why the effect on desired saving of an increase in the expected real interest rate is potentially ambiguous

Economics

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Chapter 4

1)Use the concepts of income effect and substitution effect to explain why the effect on desired saving of an increase in the expected real interest rate is potentially ambiguous.

 

 

2 What effect does a temporary increase in government purchases-for example, to fight a war-have on desired consumption and desired national saving, for a constant level of output? What is the effect on desired national saving of a lump-sum tax increase? Why is the effect of a lump-sum tax increase controversial?

 

 

3.  What is the desired capital stock? How does it depend on the expected future marginal product of capital, the user cost of capital, and the effective tax rate?

 

 

4. What is the difference between gross investment and net investment? Can gross investment be positive when net investment is negative?

 

 

5. "A permanent increase in government purchases has a larger effect than a temporary increase of the same amount." Use the saving-investment diagram to evaluate this statement, focusing on effects on consumption, investment, and the real interest rate for a fixed level of output. (Hint: The permanent increase in government purchases implies larger increases in current and future taxes.)

 

 

6. (Appendix 4.A) Draw a budget line and indifference curves for a consumer who initially is a borrower. Be sure to indicate the no-borrowing, no-lending point and the optimal consumption point. Then show the effect on the budget line and the consumer's optimal consumption of an increase in the real interest rate. Using an intermediate budget line, show the income effect and the substitution effect. Do they work in the same direction or in opposite directions? Explain your answer.

 

 

 

Chapter 5

 

1. List the categories of credit items and debit items that appear in a country's current account. What is the current account balance? What is the relationship between the current account balance and net exports?

 

 

2. What is the key difference that determines whether an international transaction appears in the current account or the capital and financial account?

 

 

3. How do a country's current account and capital and financial account balances affect its net foreign assets? If country A has greater net foreign assets per citizen than does country B, is country A necessarily better off than country B?

 

 

4. Generally, what types of changes in desired saving and desired investment lead to large current account deficits in a small open economy? What factors lead to these changes in desired saving and desired investment?

 

 

5. Under what circumstances will an increase in the government budget deficit affect the current account balance in a small open economy? In the cases in which the current account balance changes, by how much does it change?

 

 

6. What are the twin deficits? What is the connection between them?

 

 

 

7. The chief economic advisor of a small open economy makes the following announcement: "We have good news and bad news: The good news is that we have just had a temporary beneficial productivity shock that will increase output; the bad news is that the increase in output and income will lead domestic consumers to buy more imported goods, and our current account balance will fall." Analyze this statement, taking as given that a beneficial productivity shock