ECON Chapter 10 Learn Smart

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

According to the table, when disposable income is $470 billion, what is the savings?

$20 billion.

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.

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.

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).

A movement along a consumption schedule represents a change in the amount consumed and is solely caused by a change in ______.

10%.

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.

What does saving divided by income equal?

Average propensity to save.

Why does an increase in business taxes shift the investment demand curve to the left?

Because the expected profitability of investments declines.

Which of the following causes the consumption schedule to shift upward?

Borrowing by households.

Which of the following are determinants of household consumption and savings?

Borrowing, wealth, and interest rates.

______ goods have indefinite lifespans because of their durability.

Capital

Which of the following may be reasons for substantial shifts in business expectations?

Changes in trade barriers, court decisions in key labor or antitrust cases, and changes in exchange rates.

______ is relatively stable in comparison to investment spending.

Consumption spending

The relationship between spending and GDP is?

Direct.

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.

Real interest rates are rates adjusted for what?

Inflation.

______ expenditure is the most volatile component of total spending.

Investment

______ spending consists of expenditures on new plants, capital equipment, machinery, and inventories.

Investment

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.

Because the fraction of any change in income not consumed is saved, which of the following equations is true?

MPC + MPS = 1

1/(1-MPC) is what formula?

Multiplier formula.

Consumption and disposable income have what kind of relationship?

Positive.

What happens to the investment demand curve when there is an increase in demand?

Shifts to the right.

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.

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.

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 ______ propensity to consume is the fraction or percentage of total income that is consumed.

average

______ propensity to save equals saving divided by income.

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.

In the figure, an increase in acquisition, maintenance, and operating costs affects the investment demand curve _____.

by shifting it from ID0 to ID2.

To economists, the term "aggregate" means ______.

combined and total.

Average propensity to consume equals total ______ divided by total disposable income.

consumption

The ______ schedule shows the various amounts that households would plan to spend at each of the various levels of disposable income.

consumption

Saving equals disposable income minus ______.

consumption.

In 2008, a "reverse wealth effect" occurred due to ______.

dealing real estate values and falling stock market prices.

In theory, if business taxes ______, investment increases.

decrease

Any factor that leads businesses to collectively expect lower rates of return on their investments ______ investment demand.

decreases

There is a(n) ________ relationship between spending and GDP.

direct

When developing macroeconomic models, economists change their focus from the relationship between consumption and ______ income to the relationship between consumption and real GDP.

disposable

The consumption schedule shows the various amounts that households plan to consume at each level of:

disposable income.

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.

When real interest rate ______ (increase/decrease), households tend to borrow more, consume more, and save less.

fall

Increases in investment demand occur when businesses collectively expect:

greater rates of return on their investments.

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(n) ______ in business taxes shifts the investment demand curve to the left.

increase

Investment decreases when business taxes ______.

increase.

Any factor that leads businesses collectively to expect greater rates of return on their investments ______ investment demand.

increases

Firms expect either faster or slower sales and make planned changes to their:

inventories.

Firms make planned changes in their ______ levels in anticipation of faster or slower sales.

inventory

The ______ relationship between interest rates and quantity of investment conforms to the law of demand.

inverse

A change in acquisition, maintenance and operating costs affect the ______ demand curve by shifting it left or right depending on whether the costs go up or down.

investment

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 ______.

investment

When developing macroeconomic models, economists change their focus from the relationship between consumption and disposable income to the relationship between consumption and ______.

investment.

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 slope of the savings schedule is the ______ propensity to save.

marginal

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.

A change in saving divided by a change in income is equal to the ______.

marginal propensity to save.

The economic term for "extra" or "a change in" is:

marginal.

The fraction of any change in income not consumed is, by definition, the ______ ______ to ______. This explains why the marginal propensity to consume plus this fraction of any change equals one.

marginal; propensity; save.

Compared to consumption, investment is ______.

more volatile.

When real interest rates fall, households tend to borrow ______, consume ______ and save _______.

more; more; less.

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 system.

The MPC plus the MPS equals:

one.

The average propensity to consume and the average propensity to save together equal ______.

one.

The sum of MPC and MPS equals ______.

one.

A shift of the investment demand curve from ID0 to ID2 is explained by ______ business expectations.

pessimistic

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

In the figure, the consumption schedule shifts down when households consume less at each level of ______.

real GDP.

Any factor that leads businesses to collectively expect lower rates of return on their investments _____.

reduces investment demand.

In terms of the investment demand curve, an increase in demand is represented by a(n) ______ shift and a decrease in demand is represented by a(n) ______ shift.

rightward; leftward

The marginal propensity to save is equal to a change in ______ divided by a change in income.

saving

Disposable income minus consumption equals:

saving.

According to the table, ______ is $30 billion when disposable income is $510 billion.

savings

If a firm with investment demand of ID0 becomes more optimistic about future sales, costs, and profits, the investment demand curve will ______.

shift to ID1.

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 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

Spending on ______ drains off some of the additional consumption created by the increases in income.

taxes and imports

The inverse relationship between interest rates and quantity of investment conforms to ______.

the law of demand.

If household consumption is originally at C0 but households then decide to consume more at each level of real GDP, then the consumption schedule will shift ______.

upward.

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.