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a)
The validity of the statement that there would not be a big difference between human wealth and nonhuman wealth to a college student.
a)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. In relation to a college student, human and nonhuman wealth are not the same. A college student would not own any nonhuman wealth as it is the sum of financial wealth and housing wealth. Nevertheless, the human wealth possessed by a college student would be high. For example, his future income streams being adjusted for income tax.
Introduction:Human wealth could be defined as the wealth that could be earned as a result of being a human. For example income. Nonhuman wealth refers to aspects such as financial wealth and housing wealth. Although similar, these two are much different concepts.
b)
The validity of the statement that natural experiments are not in line with the idea that anticipations of future income affect consumption materially.
b)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. According to natural experiment, it has been found out that current consumption is much reliant on the expectations of future income. For example, it has been disclosed that many retired individuals in households have enough savings invested in a sound manner to be used over the rest of their lifetime. This mean that they have saved them accordingly to be smoothed across a number of years into the future and depending on the amount, current consumption would be decided.
Introduction:As per natural experiments, anticipations on future income greatly affect the consumption patterns of people. In other words, what individuals or households consume today is heavily reliant on what they expect they would receive as an income in future.
c)
The validity of the statement that anticipated growth of future income decline as a result of a financial crisis.
c)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
True
Explanation of Solution
The statement could be considered as true. During a financial crisis, the financial sector of an economy collapses although not fully. At such times, many financial and economic variables start indicating negative or adverse performance levels. As the economy is not performing well the growth rate of future income cannot be expected to be high as before.
Introduction:A financial crisis is an adverse situation where the financial sector of an economy would be hit by various events that are beyond control in most cases. At such a time, many economic variables start performing adversely. There are some variables whose behavior is in fact an indication of an upcoming financial crisis.
d)
The validity of the statement that the depreciation speed of buildings and factories are much faster than that of machines.
d)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. Buildings and factories take a much longer time to
Introduction:Depreciation is the process where assets of a business would wear out as a result of usage and/or time. Provisions would be made in the accounting process of a business for depreciation. Such amounts would be deducted from the value of the asset on an annual basis.
e)
The validity of the statement that a high Tobin’s qis an indication of the stock market’s belief that capital value is being overvalued.
e)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. A high value obtained for Tobin’s q would suggest that capital’s value in relation to the current price is too low in reality. In other words, a higher Tobin’s q value is in fact a higher capital value relative to the purchase price at present. This simply means that investments must be higher.
Introduction:Tobin’s q is a model that presents the ratio among an asset’s physical market value and its value of replacement. It was initially introduced in the 1960’s in an article called “Marginal productivity and macro-economic theories of distribution”.
f)
The validity of the statement that current profits would not affect investments unless it affects future profit expectations.
f)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. The relationship between current profit and investment could be used in explaining the impact on the latter from the former. However, investment is affected by both current expected future rates of real interest. If the current and expected interest rates are high, then the investment level would be low.
Introduction:The impact of current profits and expectations on future profits could be considered as much connected to investments made. Current profit is the profit earned at the present point in time. Expected profit is the anticipated amount that would be received at a future point in time.
g)
The validity of the statement that business cycles and corporate profits are closely linked with emphasis on past data.
g)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
True
Explanation of Solution
The statement could be considered as true. When the economic data of the US pertaining to the past three decades are being observed, it is clearly evident that business cycles create a great impact on corporate profits. At times of expansions, the profit values have been high. By contrary, at times of recession, profit values have been low.
Introduction:A business cycle is the various stages a business or an economy at large has to go through. It has a number of stages that could be favorable as well as adverse. According to the specific characteristics of each stage, the overall performance of the firm would be affected.
h)
The validity of the statement that investment and consumption changes occur in the same direction and at similar magnitudes.
h)
![Check Mark](/static/check-mark.png)
Answer to Problem 1QAP
False
Explanation of Solution
The statement could be considered as false. It is true that both investment and consumption change towards the same direction in response to various economic occurrences. However, the magnitude of the two are not the same. They are in fact much different. Ideally, relative movements in relation to consumption are much smaller than that of investments.
Introduction:Consumption and investments are two economic aspects that are of great importance at both macro and micro levels. The two concepts usually go hand in hand. However, it is important to study if the magnitude of the two are same or not.
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Chapter 15 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- 7. Consider the model where an individual has wealth k which they can either save or consume. If they save it, they receive a fixed and exogenous return r. The instantaneous utility function is given by: u(c, k) = c + a(k) where c is consumption, k is wealth, and a(k) is a function that defines the utility that an individual gets from holding wealth. The growth in wealth is given as the returns on wealth rk, plus income from working z(t), minus consumption c(t). a. Write out the differential equation for wealth. b. For an infinite time model, set up the optimal control problem with discounting at a rate 8. c. Write the current-valued Hamiltonian of this problem. d. Derive the steady-state level of consumption.arrow_forwardMacro-economic recessions, like the one in 2008 – 09, are often related to the fact that consumers consume less of many of the goods they typically consume, even if the price level does not change significantly. Relate this behaviour to the budget line and indifference curves studied in this chapter, and justify your answer with graphs.arrow_forwardConsider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest rate of (1 – t)r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. a). The relative price of consumption today to consumption tomorrow for this saver is b). Suppose the tax rate increases. How does the saver's relative price of consumption today change? A. Consumption today has the same price relative to consumption tomorrow. B. Consumption today becomes relatively more expensive C. Consumption today becomes relatively cheaper c). As a result, the substitution effect shows that A. Consumption today increases, while consumption tomorrow decreases B. Consumption today remains…arrow_forward
- Consider the following information on aggregate income, consumption expenditure, and planned investment for a country:arrow_forwarda) Draw a consumption function and label the axes.b) Suppose that your friend has a consumption function of the form y=1.4x+200. Is this function sustainable in the long run? Why or why not?c) Suppose that your consumption function is y=0.75+1000. What is your marginal propensity to consume? What is your autonomous expenditure?d) State the permanent income hypothesis.e) Suppose that I raise your income today by $10, and lower it tomorrow by $10. How would your behavior change according to the consumption function (aka Keynesian, aka rule-of-thumb) model? And what about according to the permanent income hypothesis model?arrow_forwardConsider the following intertemporal consumption problem with one good and two periods. The quantity of the good consumed in period 1 and period 2 are q1 and q2. The price of each unit of the good is $1 in both periods. The consumer’s income is I1=10 in the first period and I2=12 in the second period. The consumer can borrow or save money at the interest rate of 50%, that is, r=0.50. The consumer’s utility function is u(q1,q2)= q1q2. The optimal choice of q1 is a. 9 b. 10 c. 11 And the consumer will: d. borrow 1 e. save 1 f. borrow 2 g, save 0arrow_forward
- Problem 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_forwardQUESTION 8 As a result of entering the world economy, Neverland experiences economic boom and its GDP goes up to y- 13250: The function that describes consumption is the same, cd(r) = 5000 – 1000r +0.25Y, but the investment curve shifted to the right: 1d(r) = 550 – 1800r + 0.2Y: This is because firms expect growth to continue in the future and want to invest more. Government spending is also the same: G- 180o0. The world interest rate is 5%. What is Neverland's current account balance? Note: Type in your answer approximated to two decimal points, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard will automatically delete it and you should not do anything about it.arrow_forwardConsider a two-period consumption saving model and let ci and c2 denote the first and second period consumption, respectively. Assume that the interest rate at which the consumer may lend or borrow is 10%. Suppose that a consumer's utility function is u (C1, c2) = c1 + 20 c2. The consumer first period income is I1 = $100 and the present value of her income stream is $330. (a) What is the optimal consumption stream (consumption bundle) of this consumer? (b) Is this consumer borrower or lender? How much does she borrow or lend? (c) What is the effect of a reduction of the interest rate to 5% on the consumer's optimal first-period saving? (Make sure to take into account the effect of the decline in the interest rate on the present value of the consumer's income stream.)arrow_forward
- This question has two parts and concerns the permanent income hypothesis. Which statement best defines the permanent income hypothesis? Consumer spending depends on the level of disposable income that people expect to have over the course of their lifetime. When in a recession, although current consumer spending can be observed, future consumer spending cannot be predicted due to an unknown number of people leaving their temporary recession jobs for higher‑paying, permanent jobs that better fit their skills. Consumer spending depends on both the income and wealth of people in the economy. Consumer spending is proportional to the ratio of people in stable full‑time employment (that is, with "permanent" income) and people in unstable part‑time employment (that is, with "temporary" income). According to the permanent income hypothesis, which situations would result in an immediate increase in consumer spending, which would result in an immediate decrease in consumer spending,…arrow_forward5. The market for loanable funds and government policy The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Supply Demand LOANABLE FUNDS (Billions of dollars) Demand Supply ?arrow_forwardDemand Supply Supply Demand LOANABLE FUNDS (Billions of dollars) Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to and the level of investment to Scenario 3: Initially, the government's…arrow_forward
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