Chapter 10 Quiz

In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise?

$0.80

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

The multiplier is

Larger, the larger the MPC is and the smaller the MPS is

Larger MPCs imply larger multipliers. True or False?

True

The sum of MPC and the MPS must equal 1 because

All additional income must be spent or saved

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

An increase in personal taxes; then they both shift downward

The difference between the MPC and the APC is that the MPC is the

Change in consumption divided by change in income, whereas the APC is total consumption divided by total income

Consumption Schedule The variable on the vertical (y) axis is ____ and the variable on the horizontal (x) axis is ____ ____. These variables are ____ related.

Consumption Disposable income Directly

A large decrease in real estate values, including private homes. The consumption schedule will shift ____. The saving schedule will shift ____.

Downward Upward

If the MPS rises, then the MPC will:

Fall

Real GDP is more volatile (variable) than gross investment. True or False?

False

A reduction in the real interest rate will increase investment spending, other things equal, because firms will make an investment purchase if the expected return is

Greater than or equal to real interest rate at which it can borrow

The expected return on capital increases. Firms are planning on increasing their inventories. These scenarios shift the investment demand curve to the ____.

Right

Saving Schedule The variable on the vertical (y) axis is ____ and the variable on the horizontal (x) axis is ____ ____. These variables are ____ related. What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

Saving Disposable income Directly Real GDP and disposable income are higher

Intensifies the effect of a spending change, whether it is an increase or decrease

The multiplier effect

A sharp, sustained increase in stock prices. The consumption schedule will shift ____. The saving schedule will shift ____.

Upward Downward

A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift ____. The saving schedule will shift ____.

Upward Downward

An economy-wide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift ____. The saving schedule will shift ____.

Upward Downward

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

Yes