Exam 4: Consumption, Saving, and Investment

If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected after-tax real interest rate?

In 1991 the federal government changed the withholding amounts for personal taxes.The change meant that people wouldn't have as much withheld from their paychecks.But there was no change in the tax code itself,so the amount of tax due in April 1992 was not changed.How would consumption and saving respond to this withholding change? (Note: you may assume a real interest rate of 0%.)

If the stock market value of a firm is $10 million and the firm owns $15 million of capital,then Tobin's q equals

Suppose you divide your life into two periods-working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired. (a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save and how much will you consume in each part of your life? (b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period? (c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million,as in part (a)how much will you save and how much will you consume each period? (d)Suppose the interest rate rises (starting from the situation in part (a).Will you save more or less?

A temporary decrease in government purchases would cause

A temporary supply shock,such as a one month decrease in oil prices,would

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate,machine B costs $10,000 and depreciates at a rate of 20%,machine C costs $20,000 and depreciates at a rate of 10%,and machine D costs $17,000 and depreciates at a rate of 11%.The expected real interest rate is 5%.

The desired level of the capital stock will increase if the

Aunt Agatha has just left her nephew $5000.The most likely response is for her nephew to

The user cost of capital is given by the following formula,where is the real price of capital goods,d is the depreciation rate,and r is the expected real interest rate.

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by = 3000 - 2000r + 0.10Y = 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 = 2800 - 2000r + 0.10Y),find the equilibrium real interest rate,saving,investment,and consumption.

You are trying to figure out how much capacity to add to your factory.You will increase capacity as long as

Desired national saving would decrease unambiguously if there were

How would each of the following affect Cheryl Shirker's current consumption and saving? Cheryl is a forward-looking consumer with no borrowing constraints. (a)Cheryl's firm announces a reorganization plan,increasing Cheryl's future income dramatically. (b)Cheryl's father,who had planned to leave her a large bequest,must spend all his wealth on medical bills after a prolonged illness. (c)The real interest rate rises from its original level.Cheryl originally planned to have no assets for the future; that is,she planned to spend all her original assets and all her income when she was young,and planned to consume an amount equal to her future income when she was old.

When a company must consider taxes in determining investment,its desired capital stock is chosen such that

How would the expected real after-tax rate of return be affected by each of the following events? (1)the tax rate on interest income increases (2)expected inflation declines

Last year,Linus earned a salary of $25,000 and he spent $24,000,thus saving $1,000.At the end of the year,he received a bonus of $1,000 and he spent $500 of it,saving the other $500.What was his marginal propensity to consume?