ECMB233 MACROECONOMICS

CHAPTER 4 –COMSUMPTION, SAVING AND INVESTMENT

TUTORIAL 4
2 method
PART A

1) Desired national saving equals / I

O
A) Y - Cd - G.
① AS= AD
B) Cd + Id + G. S Y C G
=
- -

& L =
I
C) Id + G. Y c +
1 6 S I
= +

D) Y - Id - G. =

2)For a borrower, an increase in the real interest rate will lead to

A) higher current consumption and less borrowing.
B) higher current consumption and less saving.
0
C) lower current consumption and less borrowing.
D) lower current consumption and less saving.

3) The fraction of additional current income that a person consumes in the current period
is known a s the
A) consumption-smoothing motive.
B) consumption deficit.
C) saving rate.
0D) marginal propensity to consume.

4) An increase in expected future output while holding today's output constant would
A) increase today's desired consumption and increase desired national saving.
⑧B) increase today's desired consumption and decrease desired national saving.
C) decrease today's desired consumption and increase desired national saving.
D) decrease today's desired consumption and decrease desired national saving.

5) When a person receives an increase in wealth, what is likely to happen to consumption

and saving?
A) Consumption increases and saving increases.X
0
B) Consumption increases and saving decreases.
C) Consumption decreases and saving increases.
D) Consumption decreases and saving decreases. *
 6) A temporary decrease in government purchases would cause
A) a rightward shift in the saving curve and a leftward shift in the investment curve.
B) a rightward shift in the saving curve and a rightward shift in the investment curve.
0 C) a rightward shift in the saving curve, but no shift in the investment curve.
D) no shift in the saving curve, but a leftward shift in the investment curve.

7) What is the difference between gross investment and net investment?

A) Net investment = gross investment minus taxes
B) Net investment = gross investment minus net factor payments
C) Net investment = gross investment minus inventory accumulation
O D) Net investment = gross investment minus depreciation

8) The substitution effect of a decrease in real interest rates is to cause a consumer to

A) increase future consumption and decrease current consumption.
⑧
B) decrease future consumption and increase current consumption.
C) increase current consumption and increase saving.
D) decrease current consumption and increase saving.

9) When desired national saving equals desired national investment (in a closed
economy), what market is in equilibrium?
0 A) The goods market
B) The money market
C) The foreign exchange market
D) The stock market

10) An increase in the expected real interest rate tends to

A) raise desired saving only.
B) raise desired investment only.
C) raise both desired saving and desired investment.
O D) raise desired saving, but lower desired investment.

PART B

1. An economy has government purchases of 1000. Desired national saving and

desired investment are given by
Sd = 200 + 5000r + 0.10Y - 0.20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000, what is the real interest rate that
clears the goods market?
200 +
5000r + 500-200
r = 5.56%. ·
500 + 5000r
:

1000 -
4000r

9000r : 500

r: 0 055 .

:
5 56.
%
 ECMB233 MACROECONOMICS
CHAPTER 4 –COMSUMPTION, SAVING AND INVESTMENT
TUTORIAL 4

PART A

1) Desired national saving equals

⑧A) Y - Cd - G.
B) Cd + Id + G.
C) Id + G.
D) Y - Id - G.

2)For a borrower, an increase in the real interest rate will lead to

A) higher current consumption and less borrowing.
B) higher current consumption and less saving.
0
C) lower current consumption and less borrowing.
D) lower current consumption and less saving.

3) The fraction of additional current income that a person consumes in the current period
is known a s the
A) consumption-smoothing motive.
B) consumption deficit.
C) saving rate.
⑧D) marginal propensity to consume.

4) An increase in expected future output while holding today's output constant would
A) increase today's desired consumption and increase desired national saving.
⑧B) increase today's desired consumption and decrease desired national saving.
C) decrease today's desired consumption and increase desired national saving.
D) decrease today's desired consumption and decrease desired national saving.

5) When a person receives an increase in wealth, what is likely to happen to consumption

and saving?
A) Consumption increases and saving increases.
⑧B) Consumption increases and saving decreases.
C) Consumption decreases and saving increases.
D) Consumption decreases and saving decreases.
6) A temporary decrease in government purchases would cause
A) a rightward shift in the saving curve and a leftward shift in the investment curve.
B) a rightward shift in the saving curve and a rightward shift in the investment curve.
⑧
C) a rightward shift in the saving curve, but no shift in the investment curve.
D) no shift in the saving curve, but a leftward shift in the investment curve.

7) What is the difference between gross investment and net investment?

A) Net investment = gross investment minus taxes
B) Net investment = gross investment minus net factor payments
C) Net investment = gross investment minus inventory accumulation

⑧
D) Net investment = gross investment minus depreciation

8) The substitution effect of a decrease in real interest rates is to cause a consumer to

A) increase future consumption and decrease current consumption.
0
B) decrease future consumption and increase current consumption.
C) increase current consumption and increase saving.
D) decrease current consumption and increase saving.

9) When desired national saving equals desired national investment (in a closed
economy), what market is in equilibrium?
0
A) The goods market
B) The money market
C) The foreign exchange market
D) The stock market

10) An increase in the expected real interest rate tends to

A) raise desired saving only.
B) raise desired investment only.
C) raise both desired saving and desired investment.
0
D) raise desired saving, but lower desired investment.

PART B

1. An economy has government purchases of 1000. Desired national saving and

desired investment are given by
Sd = 200 + 5000r + 0.10Y - 0.20G
Id = 1000 - 4000r
When the full-employment level of output equals 5000, what is the real interest rate that
clears the goods market?

r = 5.56%.
 2. An economy has full-employment output of 5000. Government purchases are
1000. Desired consumption and desired investment are given by
Cd = 3000 - 2000r + 0.10Y 500
Id = 1000 - 4000r
where Y is output and r is the expected real interest rate.
(a) Find the real interest rate that clears the goods market. Assume that output equals
full-employment output.
(b) Calculate the amount of saving, investment, and consumption in equilibrium.
(c) If a shock to wealth causes desired consumption to decline by 200 (so that the new
equation for desired consumption is Cd = 2800 - 2000r + 0.10Y), find the equilibrium real
interest rate, saving, investment, and consumption.
Answer:
(a) Sd = Y - Cd - G = 5000 - [3000 - 2000r + 0.10Y] - 1000 = 500 + 2000r. Setting Sd =
Id gives 500 + 2000r = 1000 - 4000r, which can be solved to get r = 0.0833.
(b) Plugging this value of r into the equations for consumption and investment gives C =
3333, I = 667, and S = 667.
(c) Follow the same steps as above with the new equation for desired consumption to get:
r = 0.05, C = 3200, I = 800, S = 800.

9) S =

Y -c-0- S =

=500053500-2000r -1000 :
1000-400or

500F2000r =
1000 - 1000r
 Y = 9000

6 : 2000
S =
Y -
c -
6
C I

900
1000
-
1200
-
IB00

S =
Y -
C G
-
a) S Y C G
-
-
=

24800-8650 + 3500r-12400 -

9000
: 350or-52S0

b) Y (8650-3500r +12400) -9000 1200-2500r

-

35 00r-5250 : 1200-2500r

600or : 6450
r
:
1 .
OTs
·