Economics 201: Chapter 10 Assignment

A reduction in the real interest rate will increase investment spending, other things equal, because firms will make an investment purchase only if the expected return is

greater than or equal to the real interest rate at which it can borrow

What scenarios will shift the investment demand curve right?

the expected return on capital on capital increases and firms are planning on increasing their inventories

If the MPS rises, then the MPC will:

fall

The multiplier will be

larger, the larger the MPC and the smaller the MPS

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule. The exception to this relationship occurs when

there is an increase in personal taxes, then consumption and saving both shift downward

In year 1, 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

Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yielding between 15 and 20 percent; another $10 billion yielding between 10 and 15 percent; and so forth. What will be the equilibrium level of aggregate investment if the real interest rate is 15 percent: 10 percent: 5 percent:

20 billion 30 billion 40 billion

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

5.0

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?

Real GDP and disposable income are higher

The sum of the MPC and the MPS must equal 1 because

all additional income must be spent or saved

Consumption schedule The variable on the vertical (y) axis is _______ and the variable on the horizontal (x) axis is __________ These variables are directly ______ related.

consumption; disposable income; directly

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?: A 5-year increase in the minimum age for collecting Social Security benefits: The consumption schedule will shift ________ The saving schedule will shift ________

downward; upward

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?: A large decrease in real estate values, including private homes: The consumption schedule will shift ________ The saving schedule will shift ________

downward; upward

The multiplier effect

intensifies the effect of a spending change, whether it is an increase or a decrease

Saving schedule The variable on the vertical (y) axis is _______ and the variable on the horizontal (x) axis is _________ These variables are __________

saving; disposable income; directly

The difference between the MPC and the APC is that

the MPC is the change in consumption divided by the change in income, whereas the APC is total consumption divided by total income

When a there is a change on the curve of a line...

the line will shift left if the change is negative and right if the change is positive. The line will remain parallel regardless

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?: A substantial increase in household borrowing to finance auto purchases: The consumption schedule will shift ________ The saving schedule will shift ________

upward; downward

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?: An economywide expectation that a recession is over and that a robust expansion will occur: The consumption schedule will shift ________ The saving schedule will shift ________

upward; downward

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?: A sharp, sustained increase in stock prices: The consumption schedule will shift ________ The saving schedule will shift ________

upward; downward

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