Chapter 7 - The Spending Allocation Model

Question 1

When a factor other than the real interest rate changes the consumption share of GDP, the consumption share curve _________.

Answer 1

shifts

Question 2

An _______ relationship exists between investment and the real interest rate.

Answer 2

inverse

Question 3

When real interest rates rise, firms are ______ likely to spend on investment,

Answer 3

less

Question 4

A higher real interest rate gives people ______ incentive to consume less and save for the future

Answer 4

more

Question 5

Net exports are ____________ related to the real interest rate.

Answer 5

negatively

Question 6

Exchange rate

Answer 6

the number of units of foreign currency that can be purchased with one unit of domestic currency.

Question 7

Consumption, investment, and net exports are all __________ related to the real interest rate.

Answer 7

negatively

Question 8

Real interest rate

Answer 8

the price of consumption this year relative to next year

Question 9

Why do changes in the interest rate affect investment?

Answer 9

Changes in the real interest rate affect investment because they change the borrowing costs (and also the opportunity cost of using one’s own money) for firms looking to invest

Question 10

Private investment is ________ when the government saving rate is high

Answer 10

greater

Question 11

True or False: The government share of GDP is not dependent on the real interest rate.

Answer 11

True