Macro Module 19 Household savings practice exam questions

(The attached PDF file has better formatting.)

All cash flows occur on December 31. Values for years t and t-1 are

        Item    Year t    Year t-1
Real Government Spending    547    563
Real Government Transfers    311    389
Real Taxes    754    787
Price Level     138    138
Nominal Government Bonds at year-end    ?    659
Nominal Interest Rate    4.39%    4.39%
Private Consumption     959    953
Private Capital    651    630
Utilization Rate of Capital    82.86%    84.98%
Depreciation Rate    8.73%    8.36%


The government owns no capital but purchases all goods and services from the private sector.

●    The price level does not change from year t-1 to year t.
●    The money stock does not change from year t-1 to year t, so (Mt – Mt-1) = 0.
●    Inflation is zero, so the nominal interest rate equals the real interest rate.


Question 19.1: Nominal interest paid

What is the interest paid by the government in year t on its outstanding bonds?

Answer 19.1: 659 × 4.39% = 28.93

(bonds outstanding at end of previous year × nominal interest rate on those bonds)


Question 19.2: Real interest paid

What is the real value of interest paid by the government in year t on its outstanding bonds?

Answer 19.2: 659 × 4.39% / (138 / 100) = 20.96

(bonds outstanding at end of previous year × nominal interest rate on those bonds)


Question 19.3: Net cash expenditures

What are the net cash expenditures (in real terms) by the government in year t?

Answer 19.3: 547 + 311 – 754 + 20.96 = 124.96

(net cash expenditures in real terms = government spending + government transfers – taxes + interest paid)


Question 19.4: Government debt

What is Bgt, nominal government bonds in year t?

Answer 19.4: 659 + 124.96 × (138 / 100) = 831.44

(bonds values are in nominal terms, so bonds in year t = bonds in year t-1 + real net government expenditures in year t × the price level)


Question 19.5: Household savings

What is real household savings in year t?

Answer 19.5: (651 – 630) + 831.44 / (138 / 100) – 659 / (138 / 100) = 145.96

(real household savings = increase in capital + increase in real value of bonds)