Macroeconomics CH 10 HW

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

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

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?

0.80

How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC instead is 0.67?

40 billion; 24 billion

What will the multiplier be given the MPC values below? Fill in the table with your answers. MPC: 0.9, 0.67, 0.5, 0

Multiplier = 1/(1 - MPC). Multipliers: 10, 3.0, 2, 1

What will the multiplier be given the MPS values below? Fill in the table with your answers. MPS: 0.4, 0.6, 1

Multiplier = 1/MPS Multipliers: 2.5, 1.67, 1

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project.

Yes

Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion, and saving goes up by $2 billion. a) What is the economy's MPC? What is its MPS? b) What was the APC before the increase in disposable income? What was the APC after the increase?

a) 0.9; 0.1 b) 0.75; 0.764

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year's net revenue. a) What is the expected rate of return? b) If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9 percent? If it is 11 percent?

a) 10 percent b) Yes; Yes; No

Data for output (real income) and saving are presented in the table below. a. Fill in the missing numbers (gray-shaded cells) in the table. Level of Income: 240, 260, 280, 300, 320, 340, 360, 380, 400 Consumption: 244, 260, 276, 292, 308, 324, 340, 356, 372 Saving: -4, 0, 4, 8, 12, 16, 20, 24, 28 APC: 1.0167, 1, 0.9857, 0.9733, 0.9625, 0.9529, 0.9444, 0.9368, 0.93 ASC: -0.0167, 0, 0.0143, 0.0267, 0.0375, 0.0471, 0.0556, 0.0632, 0.07 MPC: 0.8 (all cells) MSC: 0.2 (all cells) b. What is the break-even level of income in the table? What is the term that economists use for the saving situation shown at the $240 level of income? c) For each of the following items, indicate whether the value in the table is either constant or variable as income changes:

a) Formulas to Find: Consumption = Level of Income - Saving (EX: $300 - 8 = 292) APC = Consumption/Income (EX: $292/300 = 0.9733) ASC = Saving/Income (EX: -4/240 = -0.0167) MPC = Δ Consumption/Δ Income MSC = Δ Saving/Δ Income b) $260; At the $240 level of income, saving is negative. Economists refer to this as dissaving. c) MPS: Constant APC: Variable MPC: Constant APS: Variable

The multiplier effect

intensifies the effect of a spending change, whether it is an increase or a decrease.

The multiplier will be

smaller, the larger the MPC and the smaller the MPS.