Chapter 7

Question 1

Investment (I)

Answer 1

Depends on the real interest rate (r).
I = I(r)
Inverse relationship.

Question 2

Real Interest Rate (r)

Answer 2

Nominal interest rate corrected for inflation.

1. Cost of borrowing
2. Opportunity cost of using one’s own funds to finance investment spending.

Question 3

Balanced Budget

Answer 3

G = T

Question 4

Budget Deficit

Answer 4

G > T

Question 5

Budget Surplus

Answer 5

G < T

Question 6

Government Purchases (G) and Total Taxes (T)

Answer 6

Assumed to be fixed.