Chapter 10 econ

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?

0.08

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

If the MPS rises, then the MPC will:

fall

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.

True or False: Larger MPCs imply larger multipliers.

true

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

False

Which of the following scenarios will shift the investment demand curve right?

Firms are planning on increasing their inventories. the expected return on capital increase

Suppose that the linear equation for consumption in a hypothetical economy is: C = 40 + 0.75Y Also suppose that income (Y) is $400. Determine the following values:

MPC: 0.75 MPS: 0.25 Consumption: 340 APC: 0.85 Saving: 60 APS: 0.15

Suppose that the linear equation for consumption in a hypothetical economy is: C = 40 + 0.8Y Also suppose that income (Y) is $400. Determine the values for the following:

MPC: 0.8 MPS: 0.2 Consumption: 360 APC: 0.6 Saving: 40 APS: 0.1

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. 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

Suppose that an initial $20 billion increase in investment spending expands GDP by $20 billion in the first round of the multiplier process. Also, assume that GDP and consumption both rise by $16 billion in the second round of the process. 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 $18 billion in the second round, what would have been the size of the multiplier?

a) 0.8 b) 5.0 c) 10.0

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year's net revenue. Instructions: Enter your answer as a whole number. a. What is the expected rate of return? b. If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9 percent? If it is 11 percent?

a) 10 % b) yes yes no

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $540 to the year's net revenue. Instructions: Round your answer to the nearest whole number. a. What is the expected rate of return? 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?

a) 8% b) yes no no

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 ________ disposable income consumption saving dissaving and the variable on the horizontal (x) axis is _________ saving consumption disposable income dissaving . These variables are __________ inversely directly related. b)Saving schedule The variable on the vertical (y) axis is ____________ saving consumption disposable income dissaving and the variable on the horizontal (x) axis is ___________ disposable income dissaving consumption saving . These variables are ____________ inversely directly 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 high

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? a. A large decrease in real estate values, including private homes. The consumption schedule will shift _______________ The saving schedule will shift _____________ b. A sharp, sustained increase in stock prices. The consumption schedule will shift _________________ The saving schedule will shift _______________ c. An economy-wide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift ________________ The saving schedule will shift ___________________ d. A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift _________________ The saving schedule will shift _______________

a) downward upward b) upward downward c) upward downward d) upward downward

Refer to the table below and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at each prospective level of investment. Instructions: Enter your answer as a whole number. a. Assuming no change in the real interest rate, by how much and in what direction will investment change? The investment schedule will shift to the b.Which of the following might cause this change?

a) investment will decrease by 5 billion the investment will shift to the left b) An increase in excess production capacity

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.

Marginal prosperity to consume is the slope of which schedule?

consumption

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