Quiz #3A

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.

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

1/MPS

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

Data for output (real income) and saving are presented in the table below. a. Fill in the missing numbers (gray-shaded cells) in the table. Instructions: In the table, round your answers to 4 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. $240 $244 $-4 1.0167 -0.017 $260 262 -2 $280 280 0 $300 298 2 0.993 0.007 $320 316 4 $340 334 6 $360 352 8 $380 370 10 $400 388 12 0.970 0.030 What is the value of the marginal propensity to consume? Instructions: Round your answer to one decimal place. What is the value of the marginal propensity to save? b. What is the break-even level of income in the table? Instructions: Enter your answer as a whole number. Break-even level of income = What is the term that economists use for the saving situation shown at the $240 level of income? c. For each of the following items, indicate whether the value in the table is either constant or variable as income changes: The MPS is ________ as income changes. The APC is ___________ as income changes. The MPC is ____________ as income changes. The APS is ____________ as income changes.

0.9 0.1 b. 280 At the $240 level of income, saving is negative. Economists refer to this as dissaving. c. MPS: Constant (does not change with income). APC: Variable (changes with income). MPC: Constant (does not change with income). APS: Variable (changes with income).

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

False

True or False: Larger MPCs imply larger multipliers.

True

Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process.Instructions: In parts a and b, round your answers to 1 decimal place. In part c, enter your answer as a whole number. a. What is the MPC in this economy? b. What is the size of the multiplier? c. If, instead, GDP and consumption both rose by $8 billion in the second round, what would have been the size of the multiplier?

a. 0.6 b. 2.5 c. 5.0

a. The difference between the MPC and the APC is that the MPC is the b. The sum of the MPC and the MPS must equal 1 because

a. change in consumption divided by the change in income, whereas the APC is total consumption divided by total income. b. all additional income must be spent or saved.

What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? a. Consumption schedule The variable on the vertical (y) axis is ___________ and the variable on the horizontal (x) axis is ______________ . These variables are ___________ related. b. Saving schedule The variable on the vertical (y) axis is ___________ and the variable on the horizontal (x) axis is __________ . These variables are __________ related. c. 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?

a. consumption disposable income directly b. saving disposable income directly c. Real GDP and disposable income are higher.

a. The multiplier is b. The multiplier effect

a. larger, the larger the MPC is and the smaller the MPS is. b. intensifies the effect of a spending change, whether it is an increase or a decrease.

Investment spending in the United States tends to be unstable because

all of the factors mentioned in other answers contribute to the instability.

If the MPS rises, then the MPC will:

fall

The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because

in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.