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