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Relationships within an economy

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27-3 Explain how each of the following will affect the consumption and saving schedules (as they relate to GDP) or the investment schedule, other things equal:

a. a large increase in the value of real estate, including private houses
b. a decline in the real interest rate
c. a sharp, sustained decline in stock prices
d. an increase in the rate of population growth.
e. the development of a cheaper method of manufacturing computer chips.
f. a sizable increase in the retirement age for collecting social security benefits.

25-11 Relate each of the following to the recent productivity acceleration:

a. information technology
b. increasing returns
c. network effects
d. global competition

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Solution Preview

We use schedules to demonstrate relationships within an economy. The consumption schedule shows us the relationship between income and consumption. We expect that there is a relationship that is positive (higher incomes lead to higher spending). This is then plotted as a line, which shifts only if consumers begin to spend more or less at the same income level, for some reason besides income level. Examples include how wealthy they feel and their confidence in the economy. In the same way we can plot the level of savings relative to disposable income. The investment schedule is plotted as level of investment relative to interest rates. It is the most volatile as companies shift levels of investment frequently for reasons other than interest rates.

a. The increase in the value of an asset makes consumers more wealthy, and more willing to spend. This shifts the consumption schedule upward. Because less money will be available to save, the saving schedule shifts downward. Those who owned real estate before the increase would have large profits, ...

Solution Summary

Productivity accelerations and affects on consumption and saving schedules.