Answer to Question #265413 in Macroeconomics for falcon

Question

. Suppose that consumption depends on the interest rate. How, if at all, does this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment, consumption, national saving, and the interest rate?

Answer 1

if consumption depends on the interest rate, saving will also depend on it. This will imply that, the higher the interest rate, the greater will be the return to saving. Hence, the supply of loanable funds will be represented by an upward-sloping curve, rather than a vertical, curve. This analysis implies that the more responsive is consumption is, the higher the interest rates as well as national savings , and consequently, there will be the crowding out effect.