Principles of Macroeconomics CH 27

What shifts the demand curve?

-acquisition, maintenance, and operating costs -planned inventory changes -business taxes -technological change -stock of capital goods on hand

Which non-income determinants of consumption explains a shift of the consumption schedule?

-borrowing -interest rate -expectations -wealth

Reasons for substantial shifts in business expectations.

-change in trade barriers -exchange rates -court decisions in key labor or antitrust cases

In 2008 a "reverse wealth effect" occurred due to:

-declining real estate values -falling stock market prices

Determinants of household consumption and savings:

-disposable income -wealth -expectations -interest rate -borrowing

Because disposable income is either consumed or saved, the fraction of any disposable income consumed plus the fraction saved must:

-exhaust disposable income -equal one

Changes to these lead to the multiplier effect.

-government spending -consumption -net exports -investment

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

-imports -taxes

Two variables that change by more than an initial change in spending.

-income -output

Households can consume more than their current incomes by:

-liquidating wealth -borrowing from a bank -using credit cards

Name economic investments.

-new plants -machinery -capital equipment -inventories

Which of the following are non-income determinants of consumption and saving?

-real interest rate -borrowing -expectations -wealth

How do economists define the concept of personal saving?

-that part of disposable income not consumed -not spending

Due to long-term decisions and non-income determinants working in opposite directions, which of the following are relatively stable?

-the consumption schedule -the saving schedule

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 ($15/$20 = .75)

A movement along the consumption schedule in the macroeconomic model represents a change in the amount consumed and is solely caused by a change in real ___ (one word acronym).

GDP

____ propensity to consume is the ratio of a change in consumption to a change in the income that caused that consumption.

Marginal

A change in saving divided by a change in income is equal to the?

Marginal Propensity to Save (MPS)

The slope of the savings function is the?

Marginal Propensity to Save (MPS)

A business is considering an investment. The expected rate of return is 10% and the interest rate is 8%. how does the business use this information to decide whether or not to make this investment?

They will invest when the expected rate of return is greater than the interest rate.

An increase in consumer purchases of automobiles and other goods bought on credit is likely to result after ___ in the interest rate.

a decrease

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

aggregate

What does the multiplier explain?

an increase and decrease in GDP

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 the total income that is consumed.

average

The fraction of total income that is saved equals the ___ propensity to save.

average

The marginal ___ of investment is the expected rate of return.

benefit

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

decreases/shifts to the left

The investment ___ curve cumulates every firm's estimated rates of return from all investment projects.

demand

The relationship between spending and GDP is?

direct

"Break-even income" is the income level at which consumption is equal to entire ___ income.

disposable

When developing macroeconomic models, economists change their focus from the relationship between consumption and ___ income to between consumption and real GDP.

disposable

The consumption schedule shows the various amounts that households plan to consume at each level of:

disposable income

When households spend more and save less today based upon what they think might happen in the future, this is known as the economic impact of household ___.

expectations

The ___ rate of return is not guaranteed and investment involves risk.

expected

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

fall

"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

U.S. households spend most of their disposable___?

income

A(n) ___ in business taxes shifts the investment demand curve to the left.

increase

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 variability of profits contributes to the volatility of ___ spending.

investment

Most of the fluctuations in output and employment over time are due to demand shocks relating to changes in ___.

investment

The interest cost, converted to percentage terms, needs to be weighed against the expected rate of return when making ___ decisions.

investment

What is the most volatile component of total spending?

investment

When considering an investment and its rate of return, a firm looks at the profits made by other firms who:

made the same investment

In economic terms, ___ means "extra" or "a change in".

marginal

The ratio of a change in consumption to a change in the income that caused the consumption change is called?

marginal propensity to consume (MPC)

Interest is the financial cost of borrowing ___ capital in order to purchase ___ capital.

money/real

1/MPS is the formula for the spending ___.

multiplier

The real rate of interest is the ___ rate of interest minus the rate of inflation.

nominal

Mathematically, the average propensity to consume and the average propensity to save together equal ___.

one

The MPC ___ the MPS equals one.

plus

Consumption and disposable income have what kind of relationship?

positive

Which type of interest rate is used to make investment decisions?

real

The ___ interest rate is the percentage increase in purchasing power that the borrower pays the lender, while the ___ interest rate is the percentage increase in money that the borrower pays the lender.

real/nominal

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

reduces investment demand

Lower interest rates diminish the incentive to what?

save

Disposable income minus consumption equals?

saving

At best, lower interest rates shift the consumption schedule slightly upward and the saving schedule:

slightly downward

The marginal propensity to consume is the ___ of the consumption function.

slope

Consumption divided by income equals?

the average propensity to consume (APC)

What shows the relationship between investment quantity demanded and interest rate?

the investment demand curve

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

the real interest rate

To economists, the term "aggregate" means ____ and ____.

total/combined