Answer to Question #316763 in Macroeconomics for laiba

Question

Use the saving-investment diagram to analyze the effects of the following on national saving, investment, and the real interest rate. Explain your reasoning.

 

a. Consumers become more future-oriented and thus decide to save more The government introduces an investment tax credit (offset by other types of taxes, so total tax collections remain unchanged).

b. A large number of accessible oil deposits are discovered, which increases the expected future marginal product of oil rigs and pipelines. It also causes an increase in expected future income.

 

Answer 1

A).

When the consumers become more future oriented and decides to save more and govenment introduces tax credit ,this encourages investments shifting it from I¹ to I² and both savings and investments increase.

B).

the increase in expected future income decreases current desired savings,as people increase desired consumption immediately.The rise of the future marginal productivity of capital shifts the investments curve to the right .The real interest rates rises with ambiquous effect on saving and investments.