Assume that total expenditure E comprises the sum of government consumption, G, household consumption, C, and investment, I. Assume a closed macroeconomic system, so that income equals expenditure Y=E. If we define household saving, SH, as SH=Y-T-C, where the cunsumption function is a fixed proportion of disposable income, C=c(Y-T), which of the following will be true? a. Higher government spending alongside unchanged taxation will lead to higher investment and higher household saving b. Higher government spending alongside unchanged taxation will have no effect on household saving or investment c. Higher government spending alongside unchanged taxation will lead to higher household saving d. Higher government spending alongside unchanged taxation will lead to lower household saving

Assume that total expenditure E comprises the sum of government consumption, G, household consumption, C, and investment, I. Assume a closed macroeconomic system, so that income equals expenditure Y=E. If we define household saving, SH, as SH=Y-T-C, where the cunsumption function is a fixed proportion of disposable income, C=c(Y-T), which of the following will be true? a. Higher government spending alongside unchanged taxation will lead to higher investment and higher household saving b. Higher government spending alongside unchanged taxation will have no effect on household saving or investment c. Higher government spending alongside unchanged taxation will lead to higher household saving d. Higher government spending alongside unchanged taxation will lead to lower household saving

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter23: The Aggregate Expenditure Model

Section: Chapter Questions

Problem 13P

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So far we have assumed that consumption is determined by disposable income (C=C(Y-T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing). But the real interest rate may affect households' choice between consumption and saving, and firms' sales or cash flow may influence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C=C(Y-T,r), with C a decreasing function of r. With this change in the model, does an increase in G increase C, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose II(Y-T,r), with I an increasing function of Y-T (and suppose that C is given by C(Y T)). Does an increase in G increase I, decrease it, leave it unchanged, or is it not possible to tell? C. Suppose there are two types of investment. One (for example, the investment of large, mature firm) is determined by the real interest rate, and the…