Suppose That People Finally Realize That They Must Save a Larger

question 128

Essay

Suppose that people finally realize that they must save a larger proportion of their income in order to retire and that they simultaneously begin to use new technology that allows them to reduce their holdings of real cash balances as a proportion of their income. Use the IS-LM model to illustrate graphically the impact of these two changes in household behavior on output and interest rates. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values.

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Definitions:

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time. It is used to evaluate the profitability of an investment or project.

Default Rate

The proportion of loans or debt instruments that are not repaid as agreed, leading to default, within a specific period.

Monthly Interest Rate

The Monthly Interest Rate is the interest rate charged or earned per month on a loan, savings account, or investment, expressed as a percentage of the principal.

NPV

Net Present Value; a financial metric that evaluates the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows over a period of time.