Econ 101 Problem Set 5: Analyzing Capital, Investment, and Government Spending - Prof. Car | Assignments Introduction to Macroeconomics

Problem Set 5

Econ 101

1. Suppose you have the following data for capital and investment in an economy:

Year Capital Stock on Jan. 1 Depreciation Gross Investment Net Investment

1993 1000 200

1994 310

1995 120

1996 200

a. Assume that depreciation during any year is 10% of the January 1 level of the capital stock. Calculate the missing

values in the table.

b. Is net investment negative in any year? What does such a situation mean?

2. Suppose that the government wants to increase public infrastructure investment.

a. If government purchases increase, what happens to government’s share in total spending? Is there crowding out?

Why or why not?

b. Suppose instead that the government encourages private business to purchase the public infrastructure. Where will

it enter GDP? If government’s share in spending is fixed, what happens to the other shares when this

infrastructure is built?

3. Suppose that there is a leftward shift in the C/Y line due to higher consumption taxes, but at the same time, the

government increases its share in GDP to maintain the same interest rate. Describe graphically how this affects each of

the shares of GDP. If investment’s share is the only thing that affects growth in this system, what will happen to

growth as a result of this government policy?

4. Suppose C = 1,400, I = 400, G = 200, X = 0.

a. What is GDP? Calculate each component’s share of GDP.

b. Suppose government spending falls to 100 and GDP does not change. What is government spending’s share of

GDP now? What is the new nongovernment share?

c. What happens to C/Y, X/Y, and I/Y? (Do not calculate anything—just give a direction.) Explain the mechanism

by which each of these changes happens.

5. Draw two sets of diagrams like Figure 22.7 to depict two situations. In one set, draw investment and net exports being

very sensitive to interest rates—that is, the I/Y and X/Y curves are very flat. In the other set, draw investment and net

exports as insensitive to interest rates—that is, the I/Y and X/Y curves are nearly vertical. For the same increase in the

government’s share in GDP, in which set of diagrams will interest rates rise more? Why?

Practice Multiple Choice Questions (not for quiz):

1. The actual amount of purchases of new goods for use in production by businesses each year is referred to as

a. gross investment.

b. net investment.

c. private-sector expenditures.

d. nongovernment expenditures.

2. The term I does not include

a. depreciation.

b. net investment.

c. public infrastructure investment.

d. investments that improve the capital stock.

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Problem Set 5 Econ 101

Suppose you have the following data for capital and investment in an economy: Year Capital Stock on Jan. 1 Depreciation Gross Investment Net Investment 1993 1000 200 1994 310 1995 120 1996 200 a. Assume that depreciation during any year is 10% of the January 1 level of the capital stock. Calculate the missing values in the table. b. Is net investment negative in any year? What does such a situation mean?
Suppose that the government wants to increase public infrastructure investment. a. If government purchases increase, what happens to government’s share in total spending? Is there crowding out? Why or why not? b. Suppose instead that the government encourages private business to purchase the public infrastructure. Where will it enter GDP? If government’s share in spending is fixed, what happens to the other shares when this infrastructure is built?
Suppose that there is a leftward shift in the C/Y line due to higher consumption taxes, but at the same time, the government increases its share in GDP to maintain the same interest rate. Describe graphically how this affects each of the shares of GDP. If investment’s share is the only thing that affects growth in this system, what will happen to growth as a result of this government policy?
Suppose C = 1,400, I = 400, G = 200, X = 0. a. What is GDP? Calculate each component’s share of GDP. b. Suppose government spending falls to 100 and GDP does not change. What is government spending’s share of GDP now? What is the new nongovernment share? c. What happens to C/Y, X/Y, and I/Y? (Do not calculate anything—just give a direction.) Explain the mechanism by which each of these changes happens.
Draw two sets of diagrams like Figure 22.7 to depict two situations. In one set, draw investment and net exports being very sensitive to interest rates—that is, the I/Y and X/Y curves are very flat. In the other set, draw investment and net exports as insensitive to interest rates—that is, the I/Y and X/Y curves are nearly vertical. For the same increase in the government’s share in GDP, in which set of diagrams will interest rates rise more? Why? Practice Multiple Choice Questions (not for quiz):
The actual amount of purchases of new goods for use in production by businesses each year is referred to as a. gross investment. b. net investment. c. private-sector expenditures. d. nongovernment expenditures.
The term I does not include a. depreciation. b. net investment. c. public infrastructure investment. d. investments that improve the capital stock.

Purchases such as national defense and police protection a. are referred to as gross investment expenditures. b. are referred to as net investment expenditures. c. are not included in GDP. d. are referred to as public infrastructure expenditures.
Public infrastructure investment a. has no effect on GDP. b. causes the share of I in GDP to increase. c. causes the share of G in GDP to increase. d. has no effect on the capital stock.
Which of the following best explains what will happen if the government purchases share of GDP falls. a. The consumption share of GDP will fall with it. b. The net export share of GDP will fall with it. c. The investment share of GDP will fall with it. d. The investment, consumption, and/or net export share of GDP will rise. e. It is not clear whether any of the other shares will change since we don't know what happens to GDP.
A higher interest rate today makes current consumption a. more expensive relative to future consumption because the return on savings is lowered. b. less expensive relative to future consumption because the return on savings is lowered. c. less expensive relative to future consumption because the return on savings is increased. d. more expensive relative to future consumption because the return on savings is increased.
An increase in the interest rate leads to a. a rightward shift in the consumption share line. b. a leftward shift in the consumption share line. c. an upward movement along the consumption share line. d. a downward movement along the consumption share line.
Which of the following situations best explains a rightward shift in the consumption share line? a. An increase in sales taxes b. A decrease in interest rates c. An increase in consumer debt d. An increase in wealth e. An increase in interest rates
When the interest rate rises a. people will choose to consume more goods and services than investment goods. b. it becomes easier to borrow funds to purchase plants and equipment. c. it becomes more expensive to finance plant and equipment expenditures. d. the investment share of GDP will not be affected.
An increase in pessimism will a. cause a rightward movement along the investment share line. b. cause a leftward movement along the investment share line. c. cause the investment share line to shift to the left. d. cause the investment share line to shift to the right. e. have no effect on the investment share line.

To bring about an increase in the share of GDP available for nongovernment use, a. interest rates have to increase. b. interest rates have to decline. c. government purchases will have to increase. d. government purchases will have to decline. e. there has to be an increase in taxes.
Which of the following statements best describes what happens to investment if the share of government spending increases by two percentage points? a. It will cause the investment share to decline by two percentage points. b. It will cause the investment share to fall by more than two percentage points. c. It will cause the investment share to fall by less than two percentage points. d. It will cause the investment share to increase by less than two percentage points.
Which of the following would increase the amount of investment crowded out by an increase in government purchases? a. A more interest-rate-sensitive exchange rate b. A less interest-rate-sensitive exchange rate c. Exports becoming more exchange-rate sensitive d. Imports becoming more exchange-rate sensitive e. Government purchases becoming less interest-rate sensitive
Which of the following best explains what is meant by the term crowding out? a. Increases in consumption expenditures, by causing interest rates to rise, result in a decline in investment expenditures. b. An increase in investment, by causing interest rates to rise, results in a drop in government purchases. c. An increase in consumption expenditures, by causing interest rates to rise, results in a decline in government purchases. d. An increase in government purchases, by causing interest rates to rise, results in a decline in investment expenditures.
If the government share of GDP equals 25 percent of GDP and the nongovernment share of GDP equals 80 percent of GDP, then a. interest rates will increase until the government share of GDP declines to 20 percent. b. nothing happens unless the government reduces its share of purchases. c. GDP will increase, shrinking each share, until the sum of the two shares equals 1. d. interest rates will increase, resulting in a decline in the investment, consumption, and net export shares.
Which of the following situations would best explain why the real long-term interest rate would decline? a. An increase in the government share of GDP b. An increase in exports c. A decrease in imports d. An increase in the investment share of GDP e. A decline in the consumption share of GDP

Econ 101 Problem Set 5: Analyzing Capital, Investment, and Government Spending - Prof. Car, Assignments of Introduction to Macroeconomics

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Download Econ 101 Problem Set 5: Analyzing Capital, Investment, and Government Spending - Prof. Car and more Assignments Introduction to Macroeconomics in PDF only on Docsity!