Question

The volatility of aggregate income depends primarily on consumption and investment volatility. Explain why investment volatility...

The volatility of aggregate income depends primarily on consumption and investment volatility. Explain why investment volatility is larger than consumption volatility, and why investment volatility is the primary driver of income volatility?

Homework Answers

Answer #1

Investment volatility is larger than then consumption volatility, because investment is most responsive and sensitive to the monetary policy such as money supply and interest rates. With decrease in interest rates, investment increases and vice versa. Since the interest rate is changed regularly by the central bank or Fed in the USA, it creates highest level of volatility. It also happens because, it creates an incentive for the firm is higher to increase investment when rates are lower. It makes investments to be highly volatile.

Income volatility happens due to investment volatility, because investment creates jobs and jobs create income. Hence, with changes in investment volume, affects the income level and it adds to the income volatility.


Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The demand for money depends primarily upon: interest rates and aggregate output. interest rates and the...
The demand for money depends primarily upon: interest rates and aggregate output. interest rates and the level of the stock market. real income and wealth. inflation and the unemployment rate. the value of gold.
Suppose the following information regarding some aggregate economy: Consumption: 200 + 0.75Y Investment: 100 + 0.10Y...
Suppose the following information regarding some aggregate economy: Consumption: 200 + 0.75Y Investment: 100 + 0.10Y Government Spending: 500 Exports: 100 Imports: 50 + 0.25Y Compute the Keynesian multiplier for this economy. Explain (i) its meaning (causes and consequences), and (ii) why is it larger than 1 but not infinite
Income    (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000...
Income    (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000 $11,000 $2,500 $5,000 $12,500   12,000 14,000 2,500 5,000 12,500 20,000 20,000 2,500 5,000 12,500 30,000 27,500 2,500 5,000 12,500 50,000 42,500 2,500 5,000 12,500 100,000 80,000 2,500 5,000 12,500 1.Calculate savings, autonomous consumption, MPC, MPS, break even income, and the equilibrium level of income (Y = AE = C + I + G + NX) in the above given information. 2. Draw a graph...
a. What is historical volatility? What is implied volatility? How to interpret the situation if you...
a. What is historical volatility? What is implied volatility? How to interpret the situation if you observe that historical volatility is lower than implied volatility? b. Why is the distinction between investment and consumption assets important in the determination of forward and futures prices? On 20th April, 2020, the future contracts for May delivery of West Texas is minus $37.63 a barrel, how to explain the negative future price using the knowledge acquired from this course?
Give an example of a consumption good and an example of an investment good. Explain why...
Give an example of a consumption good and an example of an investment good. Explain why the two are different, as a macroeconomist would think of them differently. Also, explain why investment is important for the long term health of an economy.
Aggregate Output/Income Net Taxes Planned Investment Aggregate Consumption Government Spending 1,000 200 200 680 200 1,100...
Aggregate Output/Income Net Taxes Planned Investment Aggregate Consumption Government Spending 1,000 200 200 680 200 1,100 200 200 760 200 1,200 200 200 840 200 1,300 200 200 920 200 1,400 200 200 1,000 200 1,500 200 200 1080 200 1,600 200 200 1,160 200 Please show calculation a. Complete the table by determining the aggregate expenditure, the unplanned inventory change, savings and disposable income at all income levels                           b.               Determine the marginal propensity to consume (MPC) and marginal...
Income    (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000...
Income    (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000 $11,000 $2,500 $5,000 $12,500   12,000 14,000 2,500 5,000 12,500 20,000 20,000 2,500 5,000 12,500 30,000 27,500 2,500 5,000 12,500 50,000 42,500 2,500 5,000 12,500 100,000 80,000 2,500 5,000 12,500 Calculate savings, MPC, MPS, break even income, and the equilibrium level of income (Y = AE = C + I + G +NX) in the above given information. Draw a graph showing disposable income (Yd)...
in a small open economy with full employment, consumption depends only on disposable income. National saving...
in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate measured in percentage, and the world real interest rate is 10 percent. Compute the investment, trade balance, and net capital outflow.
Table 11.1 shows some data on consumption and income (output) Planned investment is autonomous, and occurs...
Table 11.1 shows some data on consumption and income (output) Planned investment is autonomous, and occurs at the rate of $60 billion per period Income and Consumption Income (Output) Planned Consumption Planned Investment Savings Aggregate demand Unplanned Inventory Change Actual Investment 50 35 100 70 150 105 200 140 250 175 300 210 350 245 400 280 a) Calculate savings and aggregate demand at each level of income. b) For each level of output, work out the unplanned change in...
Explain why the consumption function is upward sloping and the investment function is horizontal. [30 marks]
Explain why the consumption function is upward sloping and the investment function is horizontal. [30 marks]
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT