Question

3. As long as both current and future consumption are normal goods, a decrease in the...

3. As long as both current and future consumption are normal goods, a decrease in the interest rate will result in a drop in savings. True or False? Explain.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

False

Effect of a decrease in saving rate depends on income effect and substitution effect.

According to substitution effect, decrease in interest rate increases the cost of savings and leads to decrease in savings today and more consumption today.

According to income effect if both current and future consumption are normal good, decrease in interest rate might lead to increase in savings today to have the desired level of consumption possibility in future. So it leads to decrease in consumption today and increase in savings.

So the net effect depends on which effect outweighs. If substitution effect dominates, savings decrease.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
If current and future consumption are both normal goods, an increase in the interest rate will...
If current and future consumption are both normal goods, an increase in the interest rate will necessarily: 1) cause savers to save more 2) cause borrowers to borrow less 3) reduce everyone's current consumption 4) make everyone worse off 5) none of the above the answer is 2), but I can't understand why 1) can't be an answer. Please explain the answer thoroughly.
For “standard” goods, the consumption of a good today has no effect on future consumption. But,...
For “standard” goods, the consumption of a good today has no effect on future consumption. But, the authors suggest that this is not true of all goods. 1. Briefly explain the distinction between a “lagged-demand” and a “network” good, giving examples of each. (4) 2. If the widgets are a “network” good, how would it affect your firm’s pricing strategy. (4)
If the Fed wishes to decrease long-term investment spending, it must cut the current short-term interest...
If the Fed wishes to decrease long-term investment spending, it must cut the current short-term interest rate. convince the public that the expected future short-term rates would be low. raise the short-term interest rates and the expected short-term future rates. Both cut the current short-term interest rate and convince the public that the expected future short-term rates would be low are correct.
1. Expectations that disposable income will increase in the future will a. shift the current consumption...
1. Expectations that disposable income will increase in the future will a. shift the current consumption function up b. shift the current consumption function down c.result in a movement upward along the current consumption function d. make the current consumption function flatter e. make the current consumption function steeper 2. The partners in the Wonderwords word processing firm spend $12,000 on computers, hoping to earn an additional $1,000 per year with them. If the partners could earn 7 percent interest...
Other things held constant, a decrease in expected future income would decrease today's desired consumption and...
Other things held constant, a decrease in expected future income would decrease today's desired consumption and decrease desired national saving decrease today's desired consumption and increase desired national saving increase today's desired consumption and decrease desired national saving increase today's desired consumption and increase desired national saving None of the above 0.3 points    QUESTION 2 Other things held constant, an increase in current income would decrease today's desired consumption and decrease desired national saving decrease today's desired consumption and...
When government purchases goes up without current increase in tax rate, it will increase the expected...
When government purchases goes up without current increase in tax rate, it will increase the expected future tax rate, by which decrease the expected future income. as a result of which, desired consumption falls and desired savings goes up. <- this is my opinion based on what I read the book. However, according to the formula , Savings = Y - C - G. when G goes up, it directly affect the S, ( decreases S), this is contradicting how...
a. Consider the following long-run model: Real GDP (Y) = 2,000; Consumption (C) = 300 +...
a. Consider the following long-run model: Real GDP (Y) = 2,000; Consumption (C) = 300 + 0.6 (Y-T); Investment (I) = 500 -30r where r is the real interest rate; Taxes (T) = 450; Government spending (G) = 400. i. Compute consumption, private savings, public savings, national savings, investment and the real interest rate. ii. Using the same model, except now C= 200 + 0.6(Y-T). Compute consumption, private savings, public savings, national savings, investment and the real interest rate. iii....
Supercars such as Ferrari and Lamborghini are not normal goods. Instead, they are luxury goods. True...
Supercars such as Ferrari and Lamborghini are not normal goods. Instead, they are luxury goods. True or False, briefly explain your answer.
Describe and explain the short-run and long-run effects of an exogenous decrease in money demand on...
Describe and explain the short-run and long-run effects of an exogenous decrease in money demand on a closed economy. 1. What is the effect of an exogenous decrease in money demand in the Aggregate Demand/Aggregate Supply (AD/AS) diagram? 2. Consumption 3. Real GDP 4. Price level 5. Unemployment 6. Interest rate 7. Investment
3. Suppose that the expected future marginal product of capital is MPKf = 20 – 0.02K,...
3. Suppose that the expected future marginal product of capital is MPKf = 20 – 0.02K, where K is the future capital stock. The depreciation rate of capital, d, is 20% per period. The current capital stock is 900 units of capital. The price of a unit of capital is 1 unit of output. Firms pay taxes equal to 50% of their output. The consumption function in the economy is C= 100 + 0.5Y-200r, where C is consumption, Y is...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT