Ch 10 Macroeconomics - Economic Relationships

12 percent

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

The wealth effect

In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as what?

It'll either increase or decrease

If business taxes are reduced and the real interest rate increases, what will happen to the level of investment spending?

An upward shift of the saving schedule

If for some reason households become increasingly thrifty, we could show this with what?

Increases by $10 billion

If the MPC is 0.70 and investment increases by $3 billion, what happens to the equilibrium GDP?

Consumption and saving cannot be determined from the information given

If the MPC is 0.8 and disposable income is $200, then what can be determined for consumption/saving?

falls

If the MPS rises, then the MPC _____.

0.80

In year 1, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise?

Increase absolutely but decline as a percentage of income

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

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

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

The multiplier effect

An increase in investment causing GDP to change by a larger amount can refer to what?

consume

As disposable income goes up, the average propensity to ________ falls

Dissaving

Consumption expenditure in excess of disposable income; a negative saving flow

increase

Given the expected rate of return on all possible investment opportunities in the economy, an (increase/decrease) in the real rate of interest will reduce the level of investment.

1/(1 − MPC) or 1/MPS

How to calculate the multiplier effect

APC is greater than 1

Suppose a family's consumption exceeds its disposable income. What can be determined for its APC?

All the points at which consumption and income are equal

The 45-degree line on a graph relating consumption and income shows what?

average propensity to consume (APC)

The average amount of a dollar of disposable income spent on consumption. Consumption / income

The change in GDP resulting from a change in spending

The multiplier is useful in determining what?

larger; smaller

The multiplier will be larger, the ______ the MPC and _______ the MPS.

The real interest rate

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

Magnifies initial changes in spending into larger changes in GDP

The practical significance of the multiplier is that it does what?

investment demand schedule

The relationship between the real interest rate and investment

A

Which of the following will cause the investment demand curve to shift to the left? (a) an increase in the excess production capacity available in industry (b) a decrease in business taxes (c) increased business optimism with respect to future economic conditions. (d) a decrease in labor costs

Expected rate of return on capital goods and the real interest rate

What are the immediate determinants of investment spending?

Real GDP and disposable income are higher

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?

Level of income

What is the most important determinant of consumer spending?

C

Which of the following will cause the investment demand curve to shift to the right? (a) an increase in the excess production capacity available in industry (b) an increase in the excess production capacity available in industry (c) technological progress (d) an increase in the acquisition and maintenance cost of capital goods

C

Which of the following will cause the investment demand curve to shift to the right? (a) the availability of excess production capacity. (b) an increase in business taxes. (c) businesses becoming more optimistic about future business conditions. (d) an increase in the real interest rate

B

Which of the following will not tend to shift the consumption schedule upward? (a) a currently small stock of durable goods in the possession of consumers (b) the expectation of a future decline in the consumer price index (c) a currently low level of household debt (d) the expectation of future shortages of essential consumer goods

D

Why does investment spending in the United States tends to be unstable? (a) expected profits are highly variable (b) capital goods are durable (c) innovation occurs at an irregular pace (d) All of the above

0.6 (1.0 minus 0.4)

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

Marginal Propensity to Consume (MPC)

change in consumption/change in income