1. Chapter 4 Consumption, Saving, and Investment

2. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-2 Figure 4.1(a) The index of consumer sentiment, January 1987–December 1994

3. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-3 Figure 4.1(b) Total consumption expenditures and consumption expenditures on durable goods, 1987–1994

4. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-4 Table 4.1 Calculating After-Tax Interest Rates

5. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-5

6. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-6 Application A Ricardian Tax Cut?

7. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-7 Figure 4.2 Determination of the desired capital stock

8. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-8 Figure 4.3 A decline in the real interest rate raises the desired capital stock

9. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-9 Figure 4.4 An increase in the expected future MPK raises the desired capital stock

10. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-10 Table 4.2 Effective Tax Rate on Capital, 1990, Selected Countries

11. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-11 Figure 4.5 Gross and net investment, 1929–2002

12. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-12

13. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-13 Figure 4.6 Goods market equilibrium

14. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-14 Table 4.3 Components of Aggregate Demand for Goods (An Example)

15. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-15

16. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-16 Figure 4.7 A decline in desired saving

17. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-17 Figure 4.8 An increase in desired investment

18. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-18 Figure 4.9 Real U.S. stock prices and the ratio of consumption to GDP, 1987–2002

19. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-19 Figure 4.10 Investment and Tobin’s q, 1987–2002

20. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-20

21. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-21 Key Diagram 3 The saving– investment diagram

22. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-22 Figure 4.A.1 The budget line

23. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-23 Figure 4.A.2 Indifference curves

24. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-24 Figure 4.A.3 The optimal consumption combination

25. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-25 Figure 4.A.4 An increase in income or wealth

26. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-26 Figure 4.A.5 Life-cycle consumption, income, and saving

27. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-27 Figure 4.A.5 Life-cycle consumption, income, and saving (cont’d)

28. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-28 Figure 4.A.6 The effect of an increase in the real interest rate on the budget line

29. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-29 Figure 4.A.7 The substitution effect of an increase in the real interest rate

30. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 4-30 Figure 4.A.8 An increase in the real interest rate with both an income effect and a substitution effect