MacroEcon Chapter 12

If the MPC​ = 0.8, a permanent increase in planned real investment of​ $40 billion will increase real GDP by a total of

$200 billion

If the MPC​ = 0.9, the multiplier equals

10

Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the ___________ reference line. At that level of real GDP per​ year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.

45-degree

What does not cause the investment function to shift?

A change in the rate of interest

Dissaving

A negative saving: a situation in which spending exceeds income; can occur when a household is able to borrow or use up existing assets

Lump-sum tax

A tax that does not depend on income.

Life-cycle theory of consumption

A theory in which a person bases decisions about current consumption and saving on both current income and anticipated future income.

Permanent Income Hypothesis

A theory of consumption in which an individual determines current consumption based on anticipated average lifetime income.

APC formula

APC = real consumption / real disposable income

APS formula

APS = real saving / real disposable income

How to you calculate a change in equilibrium GDP?

Change in equilibrium real GDP = multiplier x change in autonomous spending

What are the 2 things you can do with a dollar of disposable income?

Consume it or Save it.

T/F Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income.

False

T/F The larger the MPS, the larger the multiplier.

False

T/F The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

False

Consumption goods

Goods bought by households to use up, such as food and movies.

_________ is also a flow. It includes expenditure on new machines, buildings, and equipment and in business inventories.

Investment

MPC formula

MPC = change in real consumption / change in real disposable income

MPS formula

MPS = change in real saving / change in real disposable income

What is the multiplier formula?

Multiplier = 1/1-MPC = 1/MPS

Capital goods

Producer durables; nonconsumable goods that firms use to make other goods.

Real disposable income

Real GDP minus net taxes, or after-tax real income.

Average propensity to consume (APC)

Real consumption divided by real disposable income. For any given even of real income, the proportion of total real disposable income that is consumed.

Average propensity to save (APS)

Real saving divided by real disposable income. For any given level of real income, the proportion of total real disposable income that is saved.

Investment

Spending on items such as machines and buildings, which can be used to produce goods and services in the future.

Consumption

Spending on new goods and services to be used up out of a household's current income. Whatever is not consumed is saved.

Saving

The act of not consuming all of one's current income. Whatever is not consumed out of spendable income becomes part of this flow.

45-degree reference line

The line along which planned real expenditures equal real GDP per year.

Autonomous consumption

The part of consumption that is independent of (does not depend on) the level of disposable income. Changes in this shift the consumption function.

The investment function is represented as an inverse relationship between the value of planned real investment and

The rate of interest

Marginal propensity to consume (MPC)

The ratio of the change in consumption to the change in disposable income.

Marginal propensity to save (MPS)

The ratio of the change in saving to the change in disposable income. Whatever is not saved is consumed.

Multiplier

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures.

Consumption function

The relationship between amount consumed and disposable income. It tells us how much people plan to consume at various levels of disposable income.

Net wealth

The stock of assets owned by a person, household, firm, or nation (net of any debts owed)

T/F Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.

True

T/F Because of the multiplier​ effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.

True

T/F Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.

True

T/F In the United​ States, resourse-using federal government expenditures account for almost 20 percent of real GDP.

True

T/F The difference between real exports and real imports is called real net exports.

True

T/F When including​ consumption, investment, government​ expenditures, and net​ exports, the equilibrium level of real GDP is found at the intersection of the C​ + I​ + G​ + X curve and the​ 45-degree reference line.

True

With respect to real​ GDP, planned investment is autonomous and is therefore represented graphically as

a horizontal line

For​ simplicity, we assume that real investment is _______ with respect to real GDP and therefore unaffected by the level of real GDP per year.

autonomous

We assume that the consumption function has an ________ part that is independent of the level of real GDP per year. It is labeled ​"_______ consumption".

autonomous; autonomous

The ________ propensity to consume is equal to real consumption divided by real disposable income. The ____ propensity to save is equal to real saving divided by real disposable income.

average; average

The C ​+ I ​+ G​ + X ​curve, is drawn with the price level held​ constant, whereas the AD curve allows the price level to ________. Each different price level generates a new C ​+ I ​+ G​ + X curve.

change

The AD curve is drawn with the price level​ ________, and the C​ + I​ + G​ + X curve is drawn with the price level​ ________.

changing; held constant

The saving function is the __________ of the consumption function.

complement

If actual saving exceeds planned​ investment, all of the following will occur except

consumers will purchase more goods than had been anticipated by businesses.

How do you calculate disposable income?

disposable income = consumption + saving

The consumption function shows the relationship between planned rates of real consumption and real _______ per year. The saving function is the complement of the consumption function because real saving plus real ________ must equal real disposable income.

disposable income; consumption

The ______ level of real GDP can be found where planned savings equals planned investment.

equilibrium

The non-interest-rate determinants of planned investment are _________, innovation and technological changes, and _____________.

expectations; business taxes

T/F If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $400 saved.

false

The planned investment schedule shows the relationship between real investment and the ________; it slopes _________.

interest rate; downward

The __________ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income. The _________ propensity to save is equal to the change in planned real saving divided by the change in real disposable income.

marginal; marginal

The multiplier is equal to 1 divided by the ________ propensity to __________ .

marginal; save

Any change in autonomous spending shifts the expenditure curve and causes a __________ effect on equilibrium real GDP pear year.

multiplier

When we add autonomous​ investment, I​, and autonomous government​ spending, G​, to the consumption​ function, we obtain the C ​+ I ​+ G​ curve, which represents total ___________ for a closed economy. In an open​ economy, we add the foreign​ sector, which consists of exports minus​ imports, or net​ exports, X. Total planned expenditures are thus represented by the C​ + I​ + G​ + X curve.

planned expenditures

The smaller the marginal propensity to _________, the larger the multiplier. Otherwise​ stated, the larger the marginal propensity to __________, the larger the multiplier.

save; consume

How do you calculate saving?

saving = disposable income - consumption

_______ is a flow, something that occurs over time. It equals disposable income minus consumption. In contrast ________ are a stock. They are the accumulation resulting from saving.

saving; savings

What is not a flow concept?

savings

Any change in the non-interest-rate determinants of planned investment will cause a _______ the planned investment function so that at each and every rate of interest a different amount of planned investment will be made.

shift in

For any given level of real income, the proportion of total real disposable income that is consumed is called

the average propensity to consume

T/F At any point where the consumption function intersects the 45-degree reference line C = Y.

true