Macro Chapter 30 assignment questions

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.

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

5.0

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. a. Cumulate these data and present them graphically using the graph below, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. b. What will be the equilibrium level of aggregate investment if the real interest rate is: 15 percent: $____ billion 10 percent: $____ billion 5 percent: $____ billion

a. 0, 25 10, 20 20, 15 30, 10 40, 5 50, 0 b. $20 billion $30 billion $40 billion

a. What will the multiplier be given the MPS values below? Fill in the table with your answers. b. What will the multiplier be given the MPC values below? Fill in the table with your answers. c. How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? $_____ billion How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC instead is 0.67? $_____ billion

a. 1/MPS to multiplier MPS: 0, 0.4, 0.6, 1 Multiplier: -, 2.50, 1.67, 1.00 b. 1/(1-MPC) to get multiplier MPC: 1, 0.90, 0.67, 0.50, 0 Multiplier: 10, 3, 2, 1 c. $40 billion d. $24 billion

Linear equations for the consumption and saving schedules take the general form C = a + bY and S = −a + (1 − b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption schedule. a. Use the following data to substitute specific numerical values for a and b in the consumption and saving equations. b. What is the economic meaning of b? c. Suppose that the amount of saving that occurs at each level of national income falls by $20 but that the values of b and (1 − b) remain unchanged. Restate the saving and consumption equations inserting the new numerical values.

a. C = 120 + .80(Y); S = -120 + .20(Y) b. b = MPC (1-b) = MPS c. C = 140 + .80(Y) S = -140 + .20(Y)

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. a. Assuming no change in the real interest rate, by how much and in what direction will investment change? Investment will _______ by $______ billion. The investment schedule will shift to the ______ . b.Which of the following might cause this change?

a. decrease; $5 billion left b. An increase in excess production capacity.

a. If real estate prices tumble such that wealth declines by $320, what will be the new level of consumption at the $680 billion level of disposable income? b. What will be the new level of saving?

a. $624 b. $56

Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $5 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 $6 billion in the second round, what would have been the size of the multiplier?

a. .5 MPC (use simple math with 1/(1-MPC) formula b. multiplier = 2 c. multiplier = 2.5

Suppose a handbill publisher can buy a new duplicating machine for $1,000 and the duplicator has a 1-year life. The machine is expected to contribute $1,070 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 5 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 6 percent? If it is 8 percent?

a. 7 % b. yes; yes; no

Suppose that the linear equation for consumption in a hypothetical economy is C = 60 + 0.7Y. Also suppose that income (Y) is $600. Determine the following values:

a. MPC = .70 b. MPS = .30 c. Level of consumption = $480 d. APC = .80 e. Level of saving = $120 f. APS = .20

Suppose that disposable income, consumption, and saving in some country are $800 billion, $700 billion, and $100 billion, respectively. Next, assume that disposable income increases by $80 billion, consumption rises by $60 billion, and saving goes up by $20 billion.

a. What is the economy's MPC? MPC = .75 What is its MPS? MPS = .25 b. What was the APC before the increase in disposable income? APC before = .875 What was the APC after the increase? APC after = .864

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. A 5-year increase in the minimum age for collecting Social Security benefits. The consumption schedule will shift... The saving schedule will shift... d. 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... e. 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. downward; upward d. upward; downward e. upward; downward

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

firms are planning on increasing their inventories The expected return on capital increases

a. The multiplier will be b. The multiplier effect

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

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

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

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.