Macroeconomic Chapter 10 Connect Questions

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

A business is considering investment in a new machine. The machine costs $1,000 and the real interest rate is 7%. What is the interest cost?

$70

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

- Changes in trade barriers - Changes in exchange rates - Court decisions in key labor or antitrust cases

Changes to which of the following lead to the multiplier effect?

- Consumption - Investment - Net exports - Government spending

Which of the following two variables change by more than an initial change in spending due to the multiplier effect?

- Income - Output

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

- Wealth - Borrowing - Real interest rates

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

- declining real estate values - falling stock market prices

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

- imports - taxes

If saving is $30 billion and disposable income is $510 billion, what is average propensity to save (APS)?

0.06

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)

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

The owner of a manufacturing company is considering whether or not to invest in a new sanding machine that costs $1,000. Net expected revenue after installation of the machine is $1,100. What is the expected rate of return?

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

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

______ goods have indefinite lifespans because of their durability.

Capital

Marginal propensity to consume is the slope of what schedule?

Consumption

______ is relatively stable in comparison to investment spending.

Consumption spending

What is the primary factor that determines the amounts that households will consume and save?

Disposable income

What will occur at relatively low disposable income levels?

Dissaving

When acquisition, maintenance, and operating costs rise, the expected rate of return on investment does what?

Falls

Which of the following has historically had the greatest swings in spending?

Investment

______ expenditure is the most volatile component of total spending.

Investment

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

Investment

Expected profits and interest rates are the two basic determinants of what?

Investment spending

If the economy has unused production facilities and excessive inventories of finished goods that are not being consumed, what happens to the expected rate of return on new investment?

It declines

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

MPC + MPS = 1

Borrowing in the present allows for higher consumption in the present and necessitates lower consumption in the future when the debts must be repaid. This is an example of what economic concept?

No free lunch

Consumption and disposable income have what kind of relationship?

Positive

Which of the following increases investment demand?

Profitable new products

If household expectations are of a recession and thus lower income in the future, what will happen to the consumption schedule?

Shift down

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

Shifts to the right

When households save more, the saving schedule does what?

Shifts up

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

What happens as a result of changes in wealth, expectations, interest rates, and household debt?

The consumption schedule shifts in one direction, and the saving schedule shifts in the opposite direction.

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

What does saving divided by income equal?

average propensity to save

Comparing the expected rate of return to the real interest rate in deciding whether or not invest is the same as comparing the marginal ______ and marginal ______.

benefit; cost

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

by shifting it from ID0 to ID2

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

consumption

Dissaving is when ______ is greater than disposable income.

consumption

Saving equals disposable income minus ________.

consumption

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

consumption

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

Innovations induce a large wave of investment spending that in time ultimately ______.

decreases

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

disposable

Dissaving will occur at low ______ levels.

disposable income

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

disposable income

When consumption is greater than after-tax income, it is called ______.

dissaving

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

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 ______.

expectations

"No free lunch" means that while borrowing in the present allows for higher consumption in the present, it necessitates lower consumption in the ______ when the debts that are incurred due to the borrowing must be repaid.

future

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

An ______ in business taxes shifts the investment demand curve to the left.

increase

Investment decreases when business taxes ______.

increase

When acquisition, maintenance, and operating costs ______, the expected rate of return from prospective investment projects declines.

increase

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

increases

When the economy is understocked with production facilities and when firms are selling their output as fast as they can produce it, the expected rate of return on new investment ______ and the investment demand curve shifts ______.

increases; rightward

Real interest rates are rates adjusted for what?

inflation

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

inventories

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

A firm's spending on new plants, capital equipment, machinery, and inventory is all considered ______.

investment

Expected profits and interest rates are the two basic determinants of ______ spending.

investment

The variability of profits contributes to the volatility of:

investment

Innovations induce a large wave of ______ that in time recedes.

investment spending

When households' expect rising prices in the near future, the effect on the saving schedule is that

it shifts down

The change in consumption divided by the change in income is equal to the ______ propensity to consume.

marginal

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

marginal

Investment decisions are decisions based on ______.

marginal benefit and marginal cost

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.

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 to save

The slope of the savings schedule is the

marginal propensity to save

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

marginal propensity to save.

Compared to consumption, investment is ______.

more volatile

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

more, more, less

1/MPS is the formula for the spending

multiplier

Changes in investment, consumption, net exports, and government purchases that ultimately change output and income by more than the initial change in the spending is called the

multiplier

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 effect

1/(1-MPC) is what formula?

multiplier formula

The consumption and saving schedules move in ______ directions when influenced by wealth, expectations, debt, and/or interest rates.

opposite

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

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

real GDP

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

real GDP

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

real GDP

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

reduces investment demand

If production technology improved, the investment demand curve would shift to the ______ because increased efficiency ______ production costs.

right; reduces

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

Disposable income minus consumption equals:

saving

If ______ is $15 billion and disposable income is $450 billion, the average propensity to save is 0.03.

saving

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

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 marginal propensity to consume is the ______ of the consumption schedule.

slope

As a result of the multiplier effect, a change in ______ ultimately changes output and income by more than the initial change.

spending

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

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

the law of demand

To economists, the term "aggregate" means ______.

total; combined

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