Chapter 27

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule because

all income must be consumed or saved

Investment is unstable because

unlike most consumption, it can be put off.

The difference between the MPC and the APC is that the MPC is the

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

The difference between the MPC and the MPS is that the MPC is

the fraction of the change in income spent and the MPS is the fraction of the change in income saved.

We see an increase in the multiplier when the MPC increases because

the initial change in spending results in greater consumption spending at each stage of the expansion process.

Consumption schedule The variable on the vertical (y) axis is____ and the variable on the horizontal (x) axis is _____. These variables are ___ related.

Consumption Disposable Income Directly

The variable on the vertical (y) axis is and the variable on the horizontal (x) axis is . These variables are related. 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?

Saving Disposable income Directly Real GDP and disposable income are higher

What is the central economic idea humorously illustrated in Art Buchwald's piece, "Squaring the Economic Circle"?

The multiplier effect

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 b. A sharp, sustained increase in stock prices c. A 5-year increase in the minimum age for collecting Social Security benefits d. An economy-wide expectation that a recession is over and that a robust expansion will occur e. A substantial increase in household borrowing to finance auto purchases

a. Consumption schedule: Downward Saving schedule: Upward b. Consumption schedule: Upward Saving schedule: Downward c. Consumption schedule: Upward Saving schedule: Downward d. Consumption schedule: Upward Saving schedule: Downward e. Consumption schedule: Upward Saving schedule: Downward

In what direction will each of the following occurrences shift the investment demand curve, other things equal? a. An increase in unused production capacity occurs. b. Business taxes decline. c. The costs of acquiring equipment fall. d. Widespread pessimism arises about future business conditions and sales revenues. e. A major new technological breakthrough creates prospects for a wide range of profitable new products.

a. Left b. Right c. Right d. Left e. Right

Consider the multiplier effect. The relationship between changes in spending and changes in real GDP is

a direct relationship.

The sum of MPC and the MPS must equal 1 because

all additional income must be spent or saved.

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

an increase in personal taxes; then they both shift downwar

Investment can increase even in a period in which

expected rates of return rise faster than real interest rates

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

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

The actual multiplier for the U.S. economy is smaller than the multiplier in this chapter's simple examples because it

includes other leakages from the spending and income cycle besides just saving.

The multiplier is

larger the larger the MPC and the smaller the MPS.