Chapter 12

If the marginal propensity to consume ​(MPC​) is​ 0.9, how much additional consumption will result from an increase of​ $100 billion of disposable​ income?

$90

Formula for multiplier effect

1/(1-MPC)

Which of the following statements about investment spending is​ correct? A. The optimism or pessimism of firms is an important determinant of investment spending. Your answer is not correct. B. A higher real interest rate results in less investment spending. C. When the economy moves into a​ recession, many firms will postpone buying investment goods even if the demand for their own product is strong. D. All of the above are correct.

ALL

Which of the following statements is​ correct? A. An increase in the corporate income tax decreases the​ after-tax profitability of investment spending. This is the correct answer. B. Changes in tax laws have no effect on investment spending. C. During periods of​ recession, the ability of firms to finance spending on new factories or machinery and equipment increases. D. All of the above are correct.

An increase in the corporate income tax decreases the​ after-tax profitability of investment spending.

MPS (save)

Change in (s) / change in (y)

MPC (marginal propensity to consume) formula

Change in consumption/ change in disposable income

The behavior of consumption and investment over time can be described as​ follows:

Consumption follows a​ smooth, upward​ trend, but investment is subject to significant fluctuations.

Aggregate​ expenditure, or the total amount of spending in the​ economy, equals

Consumption spending plus planned investment spending plus government purchases plus net exports. AE=C+I+G+NX

Which of the following equalities is​ correct? A. Disposable income equals national income. B. Disposable income is equal to national income plus government transfer payments plus taxes. C. Government transfer payments minus taxes equals net taxes. D. Disposable income is equal to national income minus net taxes.

Disposable income is equal to national income minus net taxes.

If firms accumulate excess inventories and then spending quickly returns to its normal​ levels, firms usually do not sell their excess inventories before returning to producing at normal levels.

False

For most of the​ 1979-2010 period, real government purchases

Rose steadily

How to find equilibrium

Where Unplanned = 0, the NE amount will be the answer

Unplanned formula

Y-AE

National Income

Y=C+S+T

multiplier effect is process by which

an increase in autonomous expenditure leads to a larger increase in real GDP.

Which of the following causes saving to​ increase?

an increase in the interest rate

MPC (consume)

change in (c) / Change in (y)

Change in national income

change in consumption + change in saving

The most important determinant of consumption is

current disposable income.

According to the paradox of​ thrift, a simultaneous increase in saving without any change in income leads to

lower real GDP in the short run but higher real GDP in the long run.

A curve showing the relationship between the price level and the level of aggregate expenditure in the​ economy, holding constant all other factors that affect aggregate​ expenditure, is called

the aggregate demand curve.

Macroeconomic equilibrium occurs where

total​ spending, or aggregate​ expenditure, equals total​ production, or GDP.

When is the economy in a​ recession?

when the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP

When aggregate expenditure is greater than​ GDP, inventories will​ __________ and GDP and total employment will​ __________.

​fall; increase