Macroeconomics Ch. 10

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

an increase in personal taxes; then they both shift downward.

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

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

The difference between the MPC and the APC is that the MPC is the:

change in consumption divided by change in income, whereas the APC is total consumption divided by total income.

In year one, 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

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

Which of the following scenarios will shift the investment demand curve right?

The expected return on capital increases, & Firms are planning on increasing their inventories

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? c. An economy-wide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift _________ The saving schedule will shift __________

upward; downward

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? d. A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift __________ The saving schedule will shift ___________

upward; downward

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? b. A sharp, sustained increase in stock prices. The consumption schedule will shift ___________ The saving schedule will shift ____________

upward; downward

If the MPS rises, then the MPC will:

Fall

True or False. Real GDP is more volatile (variable) than gross investment.

False

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?

Real GDP and disposable income are higher

True or False. Larger MPCs imply larger multipliers.

True

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. Should Irving proceed with this project?

Yes

The sum of MPC and the MPS must equal 1 because

all additional income must be spent or saved.

What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? a. Consumption schedule The variable on the vertical (y) axis is _________ correct and the variable on the horizontal (x) axis is ___________. These variables are _________ related.

consumption; disposable income; directly

In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? a. A large decrease in real estate values, including private homes. The consumption schedule will shift _________ The saving schedule will shift __________

downward; upward

The multiplier effect

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

The multiplier is

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

What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? b. Saving schedule The variable on the vertical (y) axis is __________ and the variable on the horizontal (x) axis is ____________. These variables are _____________ related.

saving; disposable income; directly