ECON CH10
If marginal propensity to consume equals 0.6 and the change in income is $12 billion, what is the change in consumption?
$7.2 billion
A business is considering investment in a new machine. The machine costs $1,000 and the real interest rate is 7%. What is the interest cost?
$70
If saving is $30 billion and disposable income is $510 billion, what is average propensity to save (APS)?
0.06
If disposable income increases from $450 to $470 billion and savings increases from $15 to $20 billion, what is the marginal propensity to save (MPS)?
0.25
When the multiplier is 4, the marginal propensity to save (MPS) is ______.
0.25
Disposable income rises by $20 billion to $40 billion. Households consume $15 billion of the increase and save $5 billion of that income. What is the marginal propensity to consume (MPC)?
0.75
The direct relationship between MPC and the multiplier is shown in the following equation:
1/(1-MPC)
If disposable income increases from $410 to $430 billion and savings increases from $5 to ____ billion, the marginal propensity to save is 0.25.
10
The owner of a manufacturing company is considering whether or not to invest in a new sanding machine that costs $1,000. Net expected revenue after installation of the machine is $1,100. What is the expected rate of return?
10%
A business is deciding whether or not to invest in new equipment. The new equipment costs $10,000, annual income from the use of the equipment is expected to be $11,000 and the annual interest cost is $1,500. The interest rate for this investment is _____%
15
If the change in real GDP is $90 billion and the initial change in spending is $30 billion, the multiplier is:
3.00
If the marginal propensity to save is 0.25, what is the multiplier?
4
When the initial change in spending is $20 billion and the resulting change in GDP is $80 billion, the multiplier is _____
4
Economists use what term to mean "total" or "combined"?
Aggregate
Borrowing affects consumption because, when a household borrows, it can increase current consumption beyond what would be possible if its spending were limited to its disposable income. What will result regarding the current consumption schedule?
An upward shift
_______ propensity to save equals saving divided by income.
Average
What does saving divided by income equal?
Average propensity to save
Which of the following causes the consumption schedule to shift upward?
Borrowing by households
What happens to the consumption schedule and the saving schedule as a result of a change in taxes?
Both the saving schedule and the consumption schedule shift in the same direction.
______ goods have indefinite lifespans because of their durability.
Capital
Marginal propensity to consume is the slope of what schedule?
Consumption
______ is relatively stable in comparison to investment spending.
Consumption spending
Which of the following may be reasons for substantial shifts in business expectations?
Court decisions in key labor or antitrust cases; Changes in exchange rates; Changes in trade barriers
What is the most significant factor for determining a nation's level of consumption and saving?
Disposable income
What is the primary factor that determines the amounts that households will consume and save?
Disposable income
A movement along the consumption schedule represents a change in the amount consumed and is solely caused by a change in real _____
GDP; income
Real interest rates are rates adjusted for what?
Inflation
Which of the following are determinants of household consumption and savings?
Interest rates; Borrowing; Wealth
Most of the fluctuations in output and employment over time are due to changes in what?
Investment
What is the most volatile component of total spending?
Investment
Which of the following has historically had the greatest swings in spending?
Investment
Expected profits and interest rates are the two basic determinants of what?
Investment spending
_____ expenditure is the most volatile component of total spending.
Investment; capital
_____ spending consists of expenditures on new plants, capital equipment, machinery, and inventories.
Investment; capital
A large ______ causes increases in consumption to decline slowly resulting in a cumulative large change in income.
MPC
Because the fraction of any change in income not consumed is saved, which of the following equations is true?
MPC + MPS = 1
The effects of lower interest rates on consumption and saving are what?
Modest
Changes to which of the following lead to the multiplier effect?
Net exports; Government spending; Investment; Consumption
Borrowing in the present allows for higher consumption in the present and necessitates lower consumption in the future when the debts must be repaid. This is an example of what economic concept?
No free lunch
What will happen to household spending if households expect prices to rise in the future?
No free lunch
Which of the following two variables change by more than an initial change in spending due to the multiplier effect?
Output; income
Consumption and disposable income have what kind of relationship?
Positive
Which of the following represents innovations that created a "wave" of investment spending?
Railroads; Cell phones; Electricity
If household expectations are of a recession and thus lower income in the future, what will happen to the consumption schedule?
Shift down
When households save more, the saving schedule does what?
Shifts up
The ratio of the vertical change to the horizontal change taking place by moving from one point to another along the line is called what?
Slope
Which of the following state how economists define the concept of personal saving?
That part of disposable income not consumed; Not spending
What happens as a result of changes in wealth, expectations, interest rates, and household debt?
The consumption schedule shifts in one direction, and the saving schedule shifts in the opposite direction.
What needs to be weighed against the expected rate of return when making investment decisions?
The interest rate
1/(1-MPC) is what formula?
The multiplier formula
The nominal interest rate minus the rate of inflation equals what?
The real interest rate
Events sometimes boost the value of existing wealth, shifting the consumption schedule upward and the saving schedule downward. This is called what?
Wealth effect
A large MPC causes increases in consumption to decline slowly resulting in:
a cumulative large change in income
The wealth effect occurs when events suddenly boost the value of existing wealth. This causes ______ shift in the consumption schedule and ______ shift in the saving schedule.
an upward; downward
The FRACTION of total income that is saved equals the _______ propensity to save.
average
The _______ propensity to consume is the fraction or percentage of total income that is consumed.
average
The fraction or percentage of total income that is consumed is called the:
average propensity to consume
Total consumption divided by total disposable income equals the ______.
average propensity to consume
The FRACTION of total income that is saved is called the:
average propensity to save
The marginal _____ of investment is the expected rate of return
benefit
The marginal _____ of investment is the expected rate of return.
benefit
Comparing the expected rate of return to the real interest rate in deciding whether or not invest is the same as comparing the marginal _____ and marginal _____.
benefit; cost
Average propensity to consume equals total _____ divided by total disposable income.
consumption
Average propensity to consume equals total divided by total _______ disposable income.
consumption
The most significant factor for determining a nation's level of ______ and savings is disposable income.
consumption
When household savings ______, the saving schedule shifts down.
decrease
When real interest rates _____, households tend to borrow more, consume more, and save less.
decrease
Innovations induce a large wave of investment spending that in time ultimately ______.
decreases
The relationship between spending and GDP is?
direct
There is a(n) relationship between spending and GDP.
direct; positive
When developing macroeconomic models, economists change their focus from the relationship between consumption and _____ income to the relationship between consumption and real GDP.
disposable
Households generally consume a portion and save a portion of additional ______ resulting from ______, causing both the consumption and saving functions to shift upward.
disposable income; lower taxes
Economists define personal saving as "not spending" or as "that part of _________ income not consumed".
disposable/discretionary
Capital goods have indefinite lifespans because of their:
durability
Since disposable income is either consumed or saved, the fraction of any disposable income consumed plus the fraction saved must be ______.
equal to 1
Changes in exchange rates, changes in the outlook for international peace, changes in trade barriers, and changes in governmental economic policies are reasons for substantial shifts in business _____.
expectations; investment
The _____ rate of return is not guaranteed and investment involves risk.
expected
The marginal benefit of investment is the ______.
expected rate of return
In 2008, a "reverse wealth effect" occurred due to ______.
falling stock market prices; declining real estate values
"No free lunch" means that while borrowing in the present allows for higher consumption in the present, it necessitates lower consumption in the _____ when the debts that are incurred due to the borrowing must be repaid.
future; long-run
At best, lower interest rates shift the consumption schedule slightly ______ and the saving schedule slightly ______.
higher; lower
Households' expectations of rising prices tomorrow may trigger more spending and less saving today. This is an example of the impact of ______.
household expectations
Spending on ______ drains off some of the additional consumption created by the increases in income.
imports; taxes
Consumption is positively related to disposable _______
income
The paying of taxes drains off some of the additional consumption spending created by the increases in ______.
income
A firm's spending on new plants, capital equipment, machinery, and inventory is all considered ______.
investment
The interest cost, converted to percentage terms, needs to be weighed against the expected rate of return when making _____ decisions.
investment
The variability of profits contributes to the volatility of:
investment
Innovations induce a large wave of ______ that in time recedes.
investment spending
The variability of profits contributes to the volatility of _____ spending.
investment; business; firm
Major innovations and technological progress tend to be
irregular
The expected rate of return:
is not guaranteed and the investment involves risk
When households' expect rising prices in the near future, the effect on the saving schedule is that
it shifts down
In economic terms ______ means "extra" or "a change in".
marginal
The change in consumption divided by the change in income is equal to the _______ propensity to consume.
marginal
The fraction of any change in income not consumed is, by definition, the _____ propensity to save. This explains why the marginal propensity to consume plus this fraction of any change equals one.
marginal
The slope of the savings schedule is the _____ propensity to save.
marginal
Investment decisions are decisions based on ______.
marginal benefit and marginal cost
The ratio of a change in consumption to a change in the income that caused the consumption change is called the
marginal propensity to consume
The slope of the savings schedule is the
marginal propensity to save
A change in saving divided by a change in income is equal to the
marginal propensity to save.
Compared to consumption, investment is ______.
more volatile
When real interest rates fall, households tend to borrow ______, consume ______ and save _______.
more, more, less
1/MPS is the formula for the spending
multiplier
Changes in investment, consumption, net exports, and government purchases that ultimately change output and income by more than the initial change in the spending is called the _____ effect.
multiplier
A business purchases a new piece of equipment. Another firm earns income from this sale and with this income builds a new factory. The contractor that built the factory earns income and uses the income to take a vacation. The resort earns income from the contractor. This scenario describes the:
multiplier effect
The average propensity to consume and the average propensity to save together equal _____
one
The sum of MPC and MPS equals
one
The consumption and saving schedules move in directions when influenced by wealth, expectations, debt, and/or interest rates.
opposite
The fraction of any change in income not consumed is, by definition, the marginal _____ to save. This explains why the marginal propensity to consume plus this fraction of any change equals one.
propensity
A business is thinking about investing in a new piece of equipment. The expected _____ of return helps the business make the decision about whether or not to invest.
rate
A movement along a consumption schedule represents a change in the amount consumed and is solely caused by a change in ______.
real GDP
When developing macroeconomic models, economists change their focus from the relationship between consumption and disposable income to the relationship between consumption and ______.
real GDP
The fraction of any change in income not consumed is, by definition, the marginal propensity to ____. This explains why the marginal propensity to consume plus this fraction of any change equals one.
save
If _______ is $15 billion and disposable income is $450 billion, the average propensity to save is 0.03.
saving
The marginal propensity to save is equal to a change in _____ divided by a change in income.
saving
The most significant factor for determining a nation's level of consumption and ______ is disposable income.
savings
The _____ of a line is the ratio of the vertical change to the horizontal change taking place by moving from one point to another on that line.
slope
The marginal propensity to consume is the ______ of the consumption schedule.
slope
The economy supports repetitive, continuous flows of ______ and income through which dollars spent by Smith are received as income by Chin and then spent by Chin and received as income by Gonzales, and so on.
spending
As a result of the multiplier effect, a change in _____ ultimately changes output and income by more than the initial change.
spending; expenditures; investment; consumption
1/MPS is the formula for:
the multiplier
To economists, the term "aggregate" means ______.
total; combined
A household's ______ is the dollar amount of all the assets that it owns minus the dollar amount of its liabilities.
wealth
In the late 1990s, skyrocketing US stock values expanded the value of household assets. This is an example of the _____ effect.
wealth
The dollar amount of all the assets that a household owns minus the dollar amount of its liabilities is called:
wealth
