Macro Econ-Ch. 10: basic MacroEcon Relationships

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

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

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 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 downward The saving schedule will shift upward

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

The consumption schedule will shift downward The saving schedule will shift upward

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

The consumption schedule will shift upward The saving schedule will shift downward

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

imports and taxes

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

The consumption schedule is drawn on the assumption that as income increases, consumption will

increase absolutely but decline as a percentage of income.

Real interest rates are rates adjusted for what?

inflation

When we draw an investment demand curve we hold constant all of the following except:

interest rate

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

inverse

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

investment

Most of the fluctuations in output and employment over time are due to changes in what?

investment

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

investment

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

investment

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

investment will take place until i and r are equal.

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

law of demand

The most important determinant of consumer spending is

level of income

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

more, more, less

Other things equal, a decrease in the real interest rate will

move the economy downward along its existing investment demand curve.

If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by

$400 billion

If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:

$5,000 billion.

A $1 billion increase in investment will cause a

(1/MPS) billion increase in GDP.

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

$20 billion

The direct relationship between MPC and the multiplier is shown in the following equation:

1/(1-MPC)

The multiplier can be calculated as

1/(1-MPC)

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%

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is

15%

If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is

22%

The multiplier effect means that

An increase in investment can cause GDP to increase by a larger amount

A rightward shift of the investment demand curve might be caused by

Business planning to increase their stock of inventories

What is the term that economists use for the saving situation shown at the $480 level of income?

Dissaving

The consumption and saving schedules reveal that the

MPC is greater than zero but less than one.

Suppose the economy's saving schedule shifts from S1 to S2, as shown in the given diagram. We can say that its

MPS has increased.

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

Real GDP

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

The consumption schedule will shift upward The saving schedule will shift downward

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

The consumption schedule will shift upward The saving schedule will shift downward

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 they both shift 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

Economists use what term to mean "total" or "combined"?

aggregate

The investment demand curve will shift to the left as a result of

an increase in the excess production capacity available in industry.

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

average

The fraction or percentage of total income that is consumed is called the:

average propensity to consume (APC)

MPC formula

change in consumption/change in disposable income

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

consumption

When real interest rates ___ households tend to borrow more, consume more, and save less.

decrease

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

decreases

The relationship between spending and GDP is?

direct

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

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

Consumption and disposable income have what kind of relationship?

positive

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

The nominal interest rate minus the rate of inflation equals what?

real interest rate

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

reduces investment demand

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

savings

APS formula

savings/disposable income

The APC can be defined as the fraction of a

specific level of total income that is consumed.

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

APC formula

total consumption/total disposable income

To economists, the term "aggregate" means ______.

total; combined

In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the

wealth effect