Macroeconomics Chapter 10

The investment demand curve will shift to the right as the result of

businesses becoming more optimistic about future business conditions.

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

businesses planning to increase their stock of inventories.

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.

The MPC can be defined as that fraction of a:

change in income that is spent.

Given the consumption schedule, it is possible to graph the relevant saving schedule by

plotting the vertical differences between the consumption schedule and the 45-degree line.

The greater is the marginal propensity to consume, the

smaller is the marginal propensity to save.

The APC can be defined as the fraction of a

specific level of total income that is consumed.

If Trent's MPC is 0.80, this means that he will

spend eight-tenths of any increase in his disposable income.

(Advanced analysis) If the equation C = 20 + 0.6Y, where C is consumption and Y is disposable income, were graphed,

the vertical intercept would be +20 and the slope would be +0.6.

The investment demand curve suggests that

there is an inverse relationship between the real rate of interest and the level of investment spending.

Refer to the given data for a hypothetical economy. At the $100 level of income, the average propensity to save is

0.10.

Refer to the given table, which illustrates the multiplier process. The marginal propensity to save is

0.2.

Refer to the given data for a hypothetical economy. If plotted on a graph, the slope of the saving schedule would be

0.20.

The consumption schedule shows

A direct relationship between aggregate consumption and aggregate income.

average propensity to consume falls

As disposable income goes up, the

(Advanced analysis) Which of the following equations correctly represents the given data?

C = 40 + 0.6Yd.

(Advanced analysis) Refer to the diagram. The equation for the consumption schedule is

C = 60 + 0.6Y.

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2?

higher expected rates of return on investment

The given figure suggests that

as income increases, consumption decreases as a percentage of income.

Refer to the given diagram. The economy is dissaving

at income level H.

When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift

both the consumption and saving schedules downward.

If the marginal propensity to consume is 0.9, then the marginal propensity to save must be

0.1

The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the highest marginal propensity to consume?

4

The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier?

4

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be

$10 billion.

(Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y, where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is A.

$100.

Refer to the given table, which illustrates the multiplier process. The total change in income resulting from the initial change in investment will be

$100.

Refer to the diagram. The break-even level of income is

$150.

Refer to the given table, which illustrates the multiplier process. The change in income in round two will be

$16.

(Advanced analysis) Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. When plotted on a graph, the vertical intercept of the consumption schedule in economy (3) is and the slope is .

$2; 0.9.

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. If the real interest rate is 15 percent, what amount of investment will be undertaken?

$30

The investment schedule in the given table indicates that if the real interest rate is 8 percent, then

$30 billion of investment will be undertaken.

Refer to the given data. If disposable income was $325, we would expect consumption to be

$305.

Refer to the diagram. At disposable income level D, the average propensity to save is equal to

.CD/0D.

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.

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by

$6 billion.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. At an income level of $400 billion, the average propensity to save in economy (2) is

0.0875.

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. If the real interest rate is 5 percent, what amount of investment will be undertaken?

$60

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. At an $800 level of disposable income, the level of saving is

$60.

Refer to the given table, which illustrates the multiplier process. The total change in consumption resulting from the initial change in investment will be

$80.

A $1 billion increase in investment will cause a

(1/MPS) billion increase in GDP.

Refer to the given data for a hypothetical economy. The marginal propensity to consume is

. 0.80.

Refer to the given graph. A movement from a to b along C1 might be caused by a(n)

. increase in real GDP.

Refer to the given graph. A shift of the consumption schedule from C2 to C1 might be caused by a(n)

. reverse wealth effect, caused by a decrease in stock market prices.

Refer to the diagram. The marginal propensity to consume is

0.6.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to consume in economy (1) is

0.7.

Refer to the given diagram. The marginal propensity to consume is

0.8.

Refer to the given table, which illustrates the multiplier process. The marginal propensity to consume is

0.8.

Refer to the given data. The marginal propensity to consume is

0.80.

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. The MPC is

0.90.

With a marginal propensity to save of 0.4, the marginal propensity to consume will be

1.0 minus 0.4.

The multiplier can be calculated as

1/(1 − MPC).

The multiplier is

1/MPS.

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is

12 percent.

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 percent.

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is

2.

If the MPC is 0.6, the multiplier will be

2.5.

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

22 percent.

If the MPS is only half as large as the MPC, the multiplier is

3.

Refer to the given table, which illustrates the multiplier process. The multiplier in this economy is

5

If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is

5.

all the points at which consumption and income are equal

6. The 45-degree line on a graph relating consumption and income shows

Tessa's break-even income is $10,000, and her MPC is 0.75. If her actual disposable income is $16,000, her level of

A. consumption spending will be $14,500.

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.

Refer to the diagram. Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. Which of the lines on the diagram represents these data?

B.

Refer to the given diagram. The marginal propensity to consume is equal to

CB/AB.

Refer to the given diagram. At income level F, the volume of saving is

CD.

Refer to the given diagram. The marginal propensity to save is equal to

CD/BD.

Refer to the given diagram. The marginal propensity to save is

CD/EF.

Refer to the diagram. At disposable income level D, consumption is equal to

D minus CD.

1 + MPS = MPC.

FALSE

174. If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels.

FALSE

A decline in the real interest rate will shift the investment demand curve to the right.

FALSE

Economists widely agree that the value of the real-world multiplier is 2.5.

FALSE

If the Hennige family's marginal propensity to consume is 0.70, then it will necessarily consume seven-tenths of its total income.

FALSE

Investment is highly stable; it increases over time at a very steady rate.

FALSE

The average propensity to consume is defined as income divided by consumption.

FALSE

The multiplier is equal to the reciprocal of the MPC.

FALSE

Which of the following is correct?

MPC + MPS = APC + APS.

Suppose an economy's consumption schedule shifts from C1 to C2, as shown in the diagram. We can say that its

MPC and APC at each income level have both increased.

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

The consumption and saving schedules reveal that the

MPC is greater than zero but less than one.

Which of the following relations is not correct?

MPS = MPC + 1

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.

If the saving schedule is a straight line, the

MPS must be constant.

(Advanced analysis) The equation for the given saving schedule is

S = −20 + 0.2Yd

(Advanced analysis) Which of the following equations represents the saving schedule implicit in the given data?

S = −40 + 0.4Yd.

1 − MPC = MPS.

TRUE

A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i.

TRUE

If the MPC is 0.9 and investment spending increases by $20 billion, real GDP will increase by $200 billion.

TRUE

The greater the MPC, the greater the multiplier.

TRUE

The multiplier shows the relationship between changes in a component of spending, say, investment, and the consequent changes in real income and output.

TRUE

The slope of the consumption schedule is measured by the MPC.

TRUE

True/False: If DI is $275 billion and the APC is 0.8, we can conclude that saving is $55 billion.

TRUE

consumption to the level of disposable income.

The consumption schedule directly relates

the amounts households intend to consume at various possible levels of aggregate income.

The consumption schedule shows

Refer to the diagram. Which of the following would increase investment while leaving an existing investment demand curve, say, ID2, in place?

a lower interest rate

Which of the following will not cause the consumption schedule to shift?

a change in consumer incomes

The multiplier effect indicates that

a change in spending will change aggregate income by a larger amount.

Which one of the following will cause a movement down along an economy's consumption schedule?

a decrease in disposable income

The relationship between consumption and disposable income is such that

a direct and relatively stable relationship exists between consumption and income.

A decline in disposable income

decreases consumption by moving downward along a specific consumption schedule

(Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how

a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.

Refer to the given diagram. Consumption will be equal to income at

an income of E.

Which one of the following will cause a movement up along an economy's saving schedule?

an increase in disposable income

The multiplier effect means that

an increase in investment can cause GDP to change by a larger amount.

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of

an increase in personal taxes.

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.

If for some reason households become increasingly thrifty, we could show this by

an upward shift of the saving schedule.

As disposable income increases, consumption

and saving both increase.

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 Mps = change in savings/change in y = s2-s1/y2-y1 =200/500 = 2/5= 4/10 MPC = 1-MPS = 1-2/5= 3/5

consume is three-fifths

The saving schedule shown in the diagram would shift downward if, all else equal,

consumer wealth rose rapidly because of a significant increase in stock market prices.

If the MPC is 0.8 and disposable income is $200, then

consumption and saving cannot be determined from the information given.

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase

consumption by $80 billion.

Dissaving occurs where

consumption exceeds income.

The APC is calculated as

consumption/income

Refer to the diagram. Consumption equals disposable income when

disposable income is B.

Refer to the given data. At the $200 level of disposable income,

dissaving is $5.

The purchase of capital goods, like consumer goods, can be postponed; it tends to contribute to in investment spending.

durable; instability

The investment demand slopes downward and to the right because lower real interest rates

enable more investment projects to be undertaken profitably.

Investment spending in the United States tends to be unstable because

expected profits are highly variable. capital goods are durable. innovation occurs at an irregular pace. all of the factors mentioned in other answers contribute to the instability.

The immediate determinants of investment spending are the

expected rate of return on capital goods and the real interest rate.

The size of the MPC is assumed to be

greater than zero but less than one.

A high rate of inflation is likely to cause a

high nominal interest rate.

(Advanced analysis) The equation C = 35 + 0.75Y, where C is consumption and Y is disposable income, shows that

households will consume $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.

The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because

in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.

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

increase absolutely but decline as a percentage of income.

If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP will

increase by $10 billion.

A decline in the real interest rate will

increase the amount of investment spending.

The saving schedule is such that as aggregate income increases by a certain amount, saving

increases, but by a smaller amount.

If 100 percent of any change in income is spent, the multiplier will be

infinitely large.

The relationship between the real interest rate and investment is shown by the

investment demand schedule.

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 multiplier applies to

investment, net exports, and government spending.

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. The expected rate of return curve

is also the investment demand curve.

Refer to the diagram. The average propensity to consume

is greater than 1 at all levels of disposable income below $100.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to save

is highest in economy (1).

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. At an income level of $40 billion, the average propensity to consume

is highest in economy (2).

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to consume

is highest in economy (3).

The numerical value of the multiplier will be smaller the

larger the slope of the saving schedule.

The most important determinant of consumption and saving is the

level of income

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID3?

lower expected rates of return on investment

The practical significance of the multiplier is that it

magnifies initial changes in spending into larger changes in GDP.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the

marginal propensity to consume will remain unchanged in each of the three countries.

In annual percentage terms, investment spending in the United States is

more variable than real GDP.

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

move the economy downward along its existing investment demand curve.

One can determine the amount of any level of total income that is consumed by

multiplying total income by the APC.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. A $2 billion increase in consumption at each level of DI could be caused by

new expectations of higher future income.

Investment spending in the United States tends to be unstable because

profits are highly variable.

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. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should

purchase the machine because the expected rate of return exceeds the interest rate.

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when

r is greater than i.

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,

r will fall as more investment is undertaken.

(Consider This) During the Great Recession of 2007-2009,

real interest rates and investment spending both declined.

Refer to the given graph. A movement from b to a along C1 might be caused by a(n)

recession.

The size of the multiplier is equal to the

reciprocal of the slope of the saving schedule.

In contrast to investment, consumption is

relatively stable.

At the point where the consumption schedule intersects the 45-degree line,

saving is zero.

If the consumption schedule is linear, then the

saving schedule will also be linear.

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

saving will increase absolutely and as a percentage of income.

Refer to the given figure. If the relevant saving schedule were constructed,

saving would be minus $20 billion at the zero level of income.

The wealth effect is shown graphically as a

shift of the consumption schedule.

Other things equal, a 10 percent decrease in corporate income taxes will

shift the investment demand curve to the right.

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

technological progress.

Dissaving means

that households are spending more than their current incomes.

An upward shift of the saving schedule suggests

that the APC has decreased and the APS has increased at each GDP level.

At the point where the consumption schedule intersects the 45-degree line,

the APC is 1.00.

The consumption schedule is such that

the MPC is constant and the APC declines as income rises.

Which of the following will not tend to shift the consumption schedule upward?

the expectation of a future decline in the consumer price index

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

the interest rate.

(Consider This) During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that

the investment demand curve shifted inward.

most important determinant of consumer spending is

the level of income

If business taxes are reduced and the real interest rate increases,

the level of investment spending might either increase or decrease.

(Last Word) Art Buchwald's article "Squaring the Economic Circle" is a humorous description of

the multiplier.

The real interest rate is

the percentage increase in purchasing power that the lender receives on a loan.

The investment demand curve portrays an inverse (negative) relationship between

the real interest rate and investment.

The MPC for an economy is

the slope of the consumption schedule or line.

Refer to the figure. The consumption schedule indicates that

up to a point, consumption exceeds income but then falls below income.

Other things equal, if the real interest rate falls and business taxes rise,

we will be uncertain as to the resulting change in investment.

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.

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.

If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule

will shift downward.