Econ 101 Ch 10 Review Problems
b. The sum of the 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.
a. The difference between the MPC and the APC is that the MPC is the
change in consumption divided by the change in income, whereas the APC is total consumption divided by total income.
Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $9 billion in the second round of the process. Instructions: Round your answers to 1 decimal place. a. What is the MPC in this economy?
0.9
Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. What was the APC after the increase? APC after =
APC after = 0.764 APC = $168/$220 = 0.7636
Suppose the wealth effect is such that a $10 change in wealth produces a $1 change in consumption at each level of income. Assume real estate prices tumble such that wealth declines by $$80. b. What will be the new level of saving?
24
Suppose the wealth effect is such that a $10 change in wealth produces a $1 change in consumption at each level of income. Assume real estate prices tumble such that wealth declines by $$80. a.What will be the new level of consumption at the $340 billion level of disposable income?
316
Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. b. What was the APC before the increase in disposable income? APC before =
APC before = 0.75 APC = $150/$200 = 0.75
Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $9 billion in the second round of the process. b. What is the size of the multiplier? c. If, instead, GDP and consumption both rose by $9.5 billion in the second round, what would have been the size of the multiplier?
B. 10.0 C. 20.0
Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. a. What is the economy's MPC? What is its MPS?
MPC = 0.90 MPC = $18/$20 =0.9 MPS = 0.10 MPS = $2/$20 =0.1
Suppose a handbill publisher can buy a new duplicating machine for $1,000 and the duplicator has a 1-year life. The machine is expected to contribute $1,080 to the year's net revenue. b. If the real interest rate at which funds can be borrowed to purchase the machine is 7.00 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9.00 percent? If it is 10.00 percent?
YES NO NO
Suppose that the linear equation for consumption in a hypothetical economy is: C = 40 + 0.9Y Also suppose that income (Y) is $400. Determine the following values:
a. MPC = 0.90 b. MPS = .10 c. Consumption =400 d. APC = 1.00 e. Saving = 0 f. APS =0.00
Suppose a handbill publisher can buy a new duplicating machine for $1,000 and the duplicator has a 1-year life. The machine is expected to contribute $1,080 to the year's net revenue. a. What is the expected rate of return?
8%
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 the real interest rate at which it can borrow.
