macro chapter 10
Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:
$6 billion
shifts of the ID curve
- acquisition, maintenance, and operating costs - business taxes - technological change - stock of capital goods on hand - planned inventory changes - expectations
determinants of investment
- expected rate of return - the real rate of interest investment should be undertaken up to the point at which the real interest rate, i, equals the expected rate of return, r,.
instability of investment
- variability of expectations - durability - irregularity of innovation - variability of profits
nonincome determinants of consumption and saving
- wealth - borrowing - expectations - real interest rates
Refer to the given data. The marginal propensity to consume is:
.80
The consumption schedule shows:
the amounts households intend to consume at various possible levels of aggregate income
Refer to the figure. The consumption schedule indicates that:
up to a point consumption exceeds income but then falls below income
Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n):
wealth effect of an increase in stock market prices.
Dissaving means:
that households are spending more than their current incomes
With a marginal propensity to save of .4, the marginal propensity to consume will be:
1.0 minus .4.
The multiplier is:
1/MPS
multiplier
1/MPS is equal to...
If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:
12 percent
Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is:
20 percent
If the MPS is only half as large as the MPC, the multiplier is:
3
The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier?
4
Which of the following will not cause the consumption schedule to shift?
A change in consumer incomes
Which of the following is correct?
APC + APS = 1
Suppose a family's consumption exceeds its disposable income. This means that its:
APC is greater than 1
At the point where the consumption schedule intersects the 45-degree line:
the APC is 1.00
Refer to the given diagram. At income level F, the volume of saving is:
CD
The consumption schedule is such that:
the MPC is constant and the APC declines as income rises
Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the:
MPC is greater in A than in B.
1
MPS + MPC is equal to...
Which of the following will not tend to shift the consumption schedule upward?
The expectation of a future decline in the consumer price index
investment of demand curve
a curve that shows the amounts of investment demanded by an economy at a series of real interest rates
wealth
a household's _______________ is the dollar amount of all the assets that it owns minus the dollar amount of its liabilities (all the debt that it owes). if a household wants more of this they will save more out of their current income which will increase their consumption possibilities
consumption schedule
a table of numbers showing the amounts households plan to spend for consumer goods at different levels of disposable income
saving schedule
a table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods) at different levels of disposable income
The 45-degree line on a graph relating consumption and income shows
all the points at which consumption and income are equal
The multiplier effect means that:
an increase in investment can cause GDP to change by a larger amount.
The investment demand curve will shift to the left as a result of:
an increase in the excess production capacity available in industry
Given the expected rate of return on all possible investment opportunities in the economy:
an increase in the real rate of interest will reduce the level of investment.
As disposable income increases, consumption:
and saving both increase
As disposable income goes up, the:
average propensity to consume falls
When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
both the consumption and saving schedules downward
variability of expectations
business expectations can change quickly when some event suggests a significant possible change in future business conditions
The investment demand curve will shift to the right as the result of:
businesses becoming more optimistic about future business conditions
durability
capital goods can last forever. firms can fix older equipment and buildings or scrap them. optimism about the future will call for high investment and less optimistic will call for smaller amounts.
The multiplier is useful in determining the:
change in GDP resulting from a change in spending
The multiplier is defined as
change in GDP/initial change in spending
multiplier
change in real GDP / change in spending
If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:
consume is three-fifths
If the MPC is .8 and disposable income is $200, then:
consumption and saving cannot be determined from the information given
The APC is calculated as:
consumption/income
The investment demand curve will shift to the right as a result of:
technological progress
The purchase of capital goods, like ____ consumer goods, can be postponed; they tend to contribute to _____ in investment spending.
durable; instability
variability of profits
high current profits create hope for high profits in the future and vise versa with lower profits. profits themselves are very likely to change from year to year
A high rate of inflation is likely to cause a:
high nominal interest rate
expectations
household ____________________ about future prices and income may affect current spending and saving. the expectation of higher prices tmrw may cause more spending today while prices are low. or expectations of a recession may lead to saving more and spending less today
planned inventory changes
if firms plan to increase their inventory the ID curve will shift to the right and if they are planning to decrease it the curve will shift to the left. they make these changes based on expected sales
Refer to the given graph. A movement from a to b along C1 might be caused by a(n):
increase in real GDP
If 100 percent of any change in income is spent, the multiplier will be:
infinitely large
The practical significance of the multiplier is that it:
magnifies initial changes in spending into larger changes in GDP
expected rate of return
marginal benefit from investment. this is not a guarantee since investment involves risks. business' will invest when this exceeds the interest rate.
Other things equal, a decrease in the real interest rate will:
move the economy downward along its existing investment demand curve
multiplier
mult. x change in spending = real gdp
irregularity of inovation
new products and processes stimulate investment but these things usually come in irregular "waves"
Refer to the given graph. A movement from b to a along C1 might be caused by a(n)
recession
In contrast to investment, consumption is:
relatively stable
At the point where the consumption schedule intersects the 45-degree line:
saving is zero
The saving schedule is drawn on the assumption that as income increases:
saving will increase absolutely and as a percentage of income
Other things equal, a 10 percent decrease in corporate income taxes will:
shift the investment-demand curve to the right
The APC can be defined as the fraction of a:
specific level of total income that is consumed
If Trent's MPC is .80, this means that he will:
spend eight-tenths of any increase in his disposable income
technological change
the development of new products, improvements in existing products, and the creation of new machinery and production processes stimulates investment. a rapid rate of progress shifts the curve to the right
expectations
the expected rate of return on investment depend son the firm's _____________________ of future sales, operating costs, and profitability of the product.
marginal propensity to consume
the fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income
marginal propensity to save
the fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income
average propensity to save
the fraction of any specific level of disposable income that is saved. as APC falls and the APS rises as disposable income increases
average propensity to consume
the fraction of any specific level of disposable income that is spent on consumer goods. the APC falls and the APC rises as the disposable income increases
acquisition, maintenance, and operating costs
the initial costs of capital goods, and the estimated costs of operating and maintaining those goods affect the expected rate of return on investment. when these costs rise the expected rate of return falls and the ID curve shifts to the left
break-even income
the level of disposable income at which households plan to consume (spend) all their income and to save none of it
The most important determinant of consumer spending is:
the level of income
multiplier
the ratio of a change in equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP
45 degree line
the reference line in a two-dimensional graph that shows equality between the variable measured on the horizontal axis and the variable measured on the vertical axis. int he aggregate expenditures model, the line along which the value of output (measured horizontally) is equal to the value of aggregate expenditures (measured vertically)
paradox of thrift
the seemingly self-contradictory bur possibly true statement that increased saving may be both good and bad for the economy. it is always good in the long run when matched with increased spending but may be bad in the short run if there is a recession because it reduces spending on goods and services. if the increased savings are not translated into increased investment then the fall in consumption spending will not be made up for by an increase in investment. the overall result will be a decrease in output and employment. if the decline in GDP is severe enough the attempt to save more will actually lead to less saving
The MPC for an economy is:
the slope of the consumption schedule or line
wealth effect
the tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls
borrowing
when a household does this it can increase current consumption beyond what would be possible if its spending were limited to its disposable income. however it necessitates lower consumption in the future since there is "no free lunch". shifts the consumption schedule upward.
business taxes
when gov. is considered firms look to the expected rate of return after taxes in decision making on investment. an increase in these would mean less profit so a shift to the left but a decrease in these would mean more profit so shift to the right
stock of capital goods on hand
when the economy is overstocked with production facilities and when firms have excessive inventories of finished goods the expected rate of return for new investment declines. firms have little incentive to invest in new things if they already have too much of another thing. ID curve shifts to the left however it would shift the right if the economy was understocked and firms were selling their output as fast as they could
real interest rates
when these fall households tend to borrow more (consume more) and save less. people will buy more things on credit when these are low. and vice versa if they are high. don't effect the schedules a lot
If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule:
will shift downward