Question

A) Explain step-by-step how each of the following will affect the consumption and saving curves. Illustrate your answers graphically (2 graphs for each). (3pts each) a. Consumers are afraid that prices will rise in the future. b. Income taxes are decreased. c. An increase in the price of houses and other assets. B) Explain step-by-step how each of the following will affect the demand for investment curve. Illustrate your answers graphically. (2.5pts each) a. A decrease in the real interest rate. b. An increase in the cost of maintaining machines.

Answer 1

Answer:

Effect of the following conditions on the consumption and saving curves.

Consumption Saving Dissaving Disposable Income Saving Saving Dissaving Disposable Income

a. Consumers are afraid that prices will rise in the future.

Consumption Disposable Income Saving Disposable Income

When consumers are afraid that the prices will rise in the future, the speculation price can lead to hoarding. This will increase the consumption level of the consumers and decline in savings.

b. Income taxes are decreased.

Consumption Disposable Income Saving Disposable Income

When income tax decreases, the disposable income increases. This will increase the consumption level of the consumers and increase in savings. In this case, the movement will be along the consumption and saving curves. They will not shift.

c. An increase in the price of houses and other assets.

Consumption Disposable Income Saving Disposable Income

When the prices of assests increase, the wealth of the consumers increases, even though there is no change in the income. This increase in wealth will increase the consumption level of the consumers and decline in savings.