Answer to Question #253181 in Macroeconomics for shon

Question

1.  What are the two components of the user cost of capital? Explain why each is a cost of using a capital good.
2. . Explain why the saving curve slopes upward and the investment curve slopes downward in the saving– investment diagram. Give two examples of changes that would shift the saving curve to the right, and two examples of changes that would shift the investment curve to the right
3. “A permanent increase in government purchases has a larger effect than a temporary increase of the same amount.” Use the saving–investment diagram to evaluate this statement, focusing on effects on consumption, investment, and the real interest rate for a fixed level of output. (Hint: The permanent increase in government purchases implies larger increases in current and future taxes.

Answer 1

1.

Interest cost- is the opportunity cost of not using funds that purchased the good in another way. For example would be if money was used to buy shares instead of buying a house.

Depreciation cost is the value lost as a good wears. For example reduction in price of vehicles as they get old.

2.

The curve slopes upward because it is expected that saving rises with increase in expected real interest rate.

Increase in income and interest rate shifts saving curve to the right while a decrease in income and interest rate shifts saving curve to the left.

3.

Consumption will decline, with no change in real interest rate as investment rises .