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Chapter 12: Q. a- For Critical Thinking (page 260)

In light of the fact that a fall in real net wealth during a recession causes real saving to increase, does the saving function shift upward or downward when real net wealth decreases? Explain your reasoning.

Short Answer

Expert verified

The investment function would shift up or down in response to changes in factors such as technology opportunities, expectations for near-term economic growth, and interest rates.

Step by step solution

01

Causes of Saving function to Shift downwards.

In general, anything other than disposable income that effects consumption or savings will cause the Functions to go upward or downward. Any change in disposable income will cause you to progress through the Functions.

02

During a recession, real income falls.

A recession is defined as a sustained reduction in economic activity lasting more than a few months. All five economic indicators have decreased: real gross national product, income, employment, manufacturing, and retail trade.

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Most popular questions from this chapter

Given each of the following values for the multiplier, calculate both the MPCand the MPS..

a. 20

b.10

c. 8

d. 5

Take a look at Figure 12-5. If current real GDP for this nation's economy is $13 trillion per year, what are the values of planned real investment and actual real investment? What is the amount of the unplanned inventory change, and why does this fact imply that real GDP must change? To what new level will real GDP adjust?

Classify each of the following as either a stock or a flow.

a. Myung Park earns \(850per week.

b. Time Warner purchases \)100million in new telecommunications equipment this month.

c. Sally Schmidt has \(1,000 in a savings account at a credit union.

d.XYZ, Inc., produces 200units of output per week.

e. Giorgio Giannelli owns three private jets.

f. Apple's production declines by 750digital devices per month.

g. Russia owes \)25 billion to the International Monetary Fund.

Consider the following diagram, which depicts a country with no government expenditure, taxes, or net exports. Answer the following questions and explain your responses using the information in the diagram.

a. What is the marginal saving propensity?

a. What is the current level of projected investment spending over the next few years?

c. What is the current period's equilibrium level of real GDP?

d. What is the current period's saving equilibrium level?

e. What will the change in equilibrium real GDP be if planned investment spending for the current period is increased by$25billion? What will the new real GDP equilibrium level be if all other variables, including the price level, remain constant?

At various times in the past-the early 1980s, early1990s, early 2000s, and late 2000s-business profit expectations plummeted, and firms cut back on their investment spending. The ratio of total investment spending to companies' aggregate profit flows decreased markedly. In each instance, real GDP declined, and the U.S. economy fell into recession. At the end of the recession intervals of the early1980s, early 1990s, and early 2000s, business profit expectations improved. Firms responded by boosting their investment spending, and both real GDP and the ratio of investment expenditures to firms' profits recovered fully. At the conclusion of the late-2000s recession, however, this ratio failed to return to its previous level. By the time you have completed this chapter, you will understand why the result during this current decade has been a sluggish improvement in real GDP and, hence, an unusually slow economic recovery.

Understand the relationship between total planned expenditures and the aggregate demand curve
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