Cowen2e_CH27_Solutions - MODERN PRINCIPLES MACROECONOMICS 9...

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S-295 Saving, Investment, and the Financial System 27 9 MODERN PRINCIPLES OF ECONOMICS MODERN PRINCIPLES : MACROECONOMICS Facts and Tools 1. If people want to smooth their consumption over time, what will they tend to do when they win the lottery: Spend most of it within a year or save most of it for later? 1. If people want to smooth their consumption, they will save most of their winnings so that they can increase their spending over time. The evidence is generally sup- portive of the theory if we recognize that some spending—such as spending on houses and cars—is equivalent to spending over time since these goods are durable. 2. A large number of economic and psychological studies demonstrate that people who are impatient in one area of their life tend to be impatient in other areas as well. This isn’t true in every single case, but of course that doesn’t matter if we’re trying to understand the “typical person.” Based on your general knowledge and educated guessing: a. Who is more likely to smoke: A criminal or a law-abiding citizen? b. Who is more likely to shoot heroin: A person who saves 20 percent of their income or a person who can’t ever find a way to save? c. Who is more likely to have a lot of credit card debt: A smoker or a nonsmoker? 2. a. A criminal is more likely to smoke. b. A person who can’t ever find a way to save is more likely to shoot heroin. c. A smoker is more likely to have a lot of credit card debt. 3. The typical savings supply curve has a positive slope. If a nation’s saving supply curve had a perfectly vertical slope, what would that mean? a. People in this country save the same amount no matter what the interest rate is. b. People in this country are extremely sensitive to interest rates when deciding how much to save. 3. The answer is a. A perfectly vertical curve would mean that people save the same amount no matter what the interest rate. 4. Consider three countries: Jovenia (average age: 25), Mittelaltistan (average age: 45), and Decrepetia (average age: 75). Based on the lifecycle theory, which of these countries will probably have: a. High savings rates? b. High rates of borrowing? c. High rates of dissaving? (That’s spending your past savings.) Solution Solution Solution Cowen2e_CH27_Solutions.indd S-295 Cowen2e_CH27_Solutions.indd S-295 11/29/11 11:44 AM 11/29/11 11:44 AM
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S-296 CHAPTER 27 Saving, Investment, and the Financial System Note: The way for entire countries to save is to build up the stock of productive capital either at home (through high investment rates) or abroad (by exporting more than importing, i.e., running a trade surplus, and using the proceeds to buy foreign investment goods and assets).
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