Principles of Economics I section 7

In a closed economy with no government, planned aggregate spending is the sum of

consumption and planned investment.

The _____ is an equation showing how an individual household's consumer spending varies with the household's current disposable income.

consumption function

According to the accelerator principle, a higher expected future growth rate in GDP leads to a higher growth rate in:

investment spending.

The ___________ is the increase in household savings when disposable income rises by $1.

marginal propensity to save

Investment spending fluctuates:

more than consumer spending.

The marginal propensity to consume (MPC) is:

the increase in consumer spending when disposable income rises by $1.

The economy of Ft. Myers, Florida, in the 2000s is an example of the impact of:

the multiplier.

If GDP is smaller than planned aggregate spending, then:

unplanned inventory investment is negative.

The marginal propensity to consume can be calculated as:

Δ in consumption /Δ in disposable income.

If real GDP is $1000 billion and the aggregate expenditure is $850 billion, then the change in inventories will be:

$150 million.

If the multiplier is 5, the marginal propensity to consume must be:

0.8. The multiplier is 1 divided by 1 less the MPC. If the MPC is 0.8, the multiplier is 1 divided by 0.2, which is 5.

Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C = 500 + 0.80Y, where Y is income. The marginal propensity to consume in Behr is:

0.80

True or False? The marginal propensity to consume is the proportion of a change in disposable income that is consumed.

True

The income-expenditure equilibrium occurs at the level of GDP where:

aggregate output equals planned aggregate spending.

Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. the marginal propensity to consume is:

0.8

In a closed economy with no government, if the consumption function is C = 250 + 0.75 ˟ YD, real GDP is $2000 and planned investment spending is $500, then planned aggregate spending is:

$2250. Planned aggregate spending is the sum of consumption, $1750, plus planned investment spending, $500, which is $2250.

If the marginal propensity to consume is 0.8, then an increase in autonomous aggregate spending of $5 billion will increase the equilibrium level of real GDP by __________.

$25 billion

GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. if GDP is $3000, planned aggregate spending is:

$3,100

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:

$30,000

If the marginal propensity to save is 0.25, a decrease in investment spending of $100 will result in a decrease in real GDP of:

$400

Suppose the marginal propensity to consume is equal to 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion increase

In an economy with no taxes or imports, if disposable income increases by $1000 and consumption increases by $600, the marginal propensity to save is:

0.4

In an economy with no taxes and no imports, when disposable income increases from $2000 to $3000, consumption increases from $1500 to $2100. Given this information, the marginal propensity to consume is:

0.6

If MPC = 0.9, the multiplier is:

10

What is the multiplier if the marginal propensity to consume (MPC) is 0.7?

3.33 The multiplier is equal to 1/(1 - MPC) = 1/(1 - 0.7) = 1/0.3 = 3.33.

If the marginal propensity to save is 0.25, the multiplier is:

4. Since the multiplier is 1 divided by 1 minus the MPC, which is the MPS, the multiplier is 1 divided by 0.25, which is 4.

What is the multiplier if the marginal propensity to consume (MPC) is 0.85?

6.67 The multiplier is equal to 1/(1 - MPC) = 1/(1 - 0.85) = 1/0.15 = 6.67.

True or False? As the marginal propensity to save decreases, the multiplier decreases.

False

True or False? Planned investment spending is positively related to the interest rate.

False

If the multiplier is 4 and there are no taxes, and government spending increases by $100 billion, real GDP will:

increase by $400 billion.

If the marginal propensity to consume increases, the multiplier will:

increase.