Chapter 12
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion of disposable income?
$90
Formula for multiplier effect
1/(1-MPC)
Which of the following statements about investment spending is correct? A. The optimism or pessimism of firms is an important determinant of investment spending. Your answer is not correct. B. A higher real interest rate results in less investment spending. C. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. D. All of the above are correct.
ALL
Which of the following statements is correct? A. An increase in the corporate income tax decreases the after-tax profitability of investment spending. This is the correct answer. B. Changes in tax laws have no effect on investment spending. C. During periods of recession, the ability of firms to finance spending on new factories or machinery and equipment increases. D. All of the above are correct.
An increase in the corporate income tax decreases the after-tax profitability of investment spending.
MPS (save)
Change in (s) / change in (y)
MPC (marginal propensity to consume) formula
Change in consumption/ change in disposable income
The behavior of consumption and investment over time can be described as follows:
Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations.
Aggregate expenditure, or the total amount of spending in the economy, equals
Consumption spending plus planned investment spending plus government purchases plus net exports. AE=C+I+G+NX
Which of the following equalities is correct? A. Disposable income equals national income. B. Disposable income is equal to national income plus government transfer payments plus taxes. C. Government transfer payments minus taxes equals net taxes. D. Disposable income is equal to national income minus net taxes.
Disposable income is equal to national income minus net taxes.
If firms accumulate excess inventories and then spending quickly returns to its normal levels, firms usually do not sell their excess inventories before returning to producing at normal levels.
False
For most of the 1979-2010 period, real government purchases
Rose steadily
How to find equilibrium
Where Unplanned = 0, the NE amount will be the answer
Unplanned formula
Y-AE
National Income
Y=C+S+T
multiplier effect is process by which
an increase in autonomous expenditure leads to a larger increase in real GDP.
Which of the following causes saving to increase?
an increase in the interest rate
MPC (consume)
change in (c) / Change in (y)
Change in national income
change in consumption + change in saving
The most important determinant of consumption is
current disposable income.
According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to
lower real GDP in the short run but higher real GDP in the long run.
A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
the aggregate demand curve.
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP.
When is the economy in a recession?
when the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall; increase