Lecture 5

ic Q&A

1. Q: What is the consumption function?
   A: The consumption function describes how consumption depends on disposable income: 

2. C=C(Y−T)

3. C=C(Y−T).

4. Q: What is the investment function?
   A: The investment function describes how investment depends on the interest rate: 

5. I=I(r)

6. I=I(r).

7. Q: What is the difference between nominal and real interest rates?
   A: The nominal interest rate is the stated rate, while the real interest rate adjusts for inflation: 

8. r=i−π

9. r=i−π.

10. Q: What is the role of financial markets in the economy?
    A: Financial markets balance savings and investment, determining the equilibrium interest rate.

11. Q: What happens to investment when government spending increases?
    A: Investment decreases due to the crowding-out effect, as higher government spending raises interest rates.

Cloze Deletions

1. The consumption function describes how consumption depends on disposable income: 

2. C=C(Y−T)

3. C=C(Y−T).

4. The investment function describes how investment depends on the interest rate: 

5. I=I(r)

6. I=I(r).

7. The real interest rate adjusts the nominal interest rate for inflation: 

8. r=i−π

9. r=i−π.

10. Financial markets balance savings and investment, determining the equilibrium interest rate.

11. Increased government spending leads to higher interest rates, which reduces private investment.

Reverse Cards

1. Term: Consumption Function
   Definition: A function that describes how consumption depends on disposable income: 

2. C=C(Y−T)

3. C=C(Y−T).

4. Term: Investment Function
   Definition: A function that describes how investment depends on the interest rate: 

5. I=I(r)

6. I=I(r).

7. Term: Real Interest Rate
   Definition: The nominal interest rate adjusted for inflation: 

8. r=i−π

9. r=i−π.

10. Term: Crowding-Out Effect
    Definition: When increased government spending leads to higher interest rates, reducing private investment.

11. Term: Equilibrium Interest Rate
    Definition: The interest rate that balances savings and investment in financial markets.