smart book chapter 30 Eco
Because the fraction of any change in income not consumed is saved, which of the following equations is true?
MPC + MPS = 1
Investment decisions are decisions based on ______,
Marginal benefit; Marginal cost
What is the interest rate paid for borrowed funds?
Marginal cost
Which of the following increases investment demand?
Profitable new products
The inverse relationship between interest rates and quantity of investment conforms to ______.
The law of demand
1/(1-MPC) is what formula?
The multiplier formula
When real interest rates _______ (increase/decrease), households tend to borrow more, consume more, and save less.
decrease
When developing macroeconomic models, economists change their focus from the relationship between consumption and _______ income to the relationship between consumption and real GDP.
disposable
The consumption schedule shows the various amounts that households plan to consume at each level of
disposable Income
What will occur at relatively low disposable income levels?
dissaving
When consumption is greater than after-tax income, it is called ______.
dissaving
Capital goods have indefinite lifespans because of their:
durability
Since disposable income is either consumed or saved, the fraction of any disposable income consumed plus the fraction saved must be ______.
equal to 1
Firms have greater incentive and means to invest in capital when they are experiencing:
expanding prices
The _______ rate of return is not guaranteed and investment involves risk.
expected
The marginal benefit of investment is the ______.
expected rate of return
In 2008, a "reverse wealth effect" occurred due to ______.
falling stock market prices declining real estates values
When acquisition, maintenance, and operating costs rise, the expected rate of return on investment does what?
falls
The paying of taxes drains off some of the additional consumption spending created by the increases in ______.
income
A(n) ______ in business taxes shifts the investment demand curve to the left.
increase
Investment decreases when business taxes _______
increase
Any factor that leads businesses collectively to expect greater rates of return on their investments ______ investment demand.
increases
When the economy is understocked with production facilities and when firms are selling their output as fast as they can produce it, the expected rate of return on new investment ______ and the investment demand curve shifts ______. Multiple choice question.
increases; rightward
Real interest rates are rates adjusted for what?
inflation
The investment demand curve shows the relationship between quantity of investment demanded and _____.
interest rates
A firm's spending on new plants, capital equipment, machinery, and inventory is all considered ______.
investment
Changes in exchange rates, changes in the outlook for international peace, changes in trade barriers, and changes in governmental economic policies are reasons for substantial shifts in business ____
investment
Expected profits and interest rates are the two basic determinants of ______ spending.
investment
Firms make planned changes in their _____ levels in anticipation of faster or slower sales.
investment
The interest cost, converted to percentage terms, needs to be weighed against the expected rate of return when making _____ decisions.
investment
The variability of profits contributes to the volatility of ______ spending.
investment
_______ spending consists of expenditures on new plants, capital equipment, machinery, and inventories.
investment
Expected profits and interest rates are the two basic determinants of what?
investment spending
Innovations induce a large wave of ______ that in time recedes.
investment spending
The variability of profits contributes to the volatility of:
investments
Major innovations and technological progress tend to be
irregular
The expected rate of return:
is not guaranteed and the investment involves risk
If the economy has unused production facilities and excessive inventories of finished goods that are not being consumed, what happens to the expected rate of return on new investment?
it declines
When households' expect rising prices in the near future, the effect on the saving schedule is that
it shifts down
Households spend a(n)___________________ proportion of a small disposable income than of a large disposable income.
larger
Based on the figure, which amount of disposable income would result in dissaving?
less than $390 billion
The fraction of any change in income not consumed is, by definition, the ______ ________ to ___________ . This explains why the marginal propensity to consume plus this fraction of any change equals one.
marginal propensity to save
The effects of lower interest rates on consumption and saving are what?
modest
What will happen to household spending if households expect prices to rise in the future?
more spending and less saving today
Compared to consumption, investment is ______.
more volatile
When real interest rates fall, households tend to borrow ______, consume ______ and save _______.
more, more, less
1/MPS is the formula for the spending ______
multiplier
Changes in investment, consumption, net exports, and government purchases that ultimately change output and income by more than the initial change in the spending is called the _____ effect.
multiplier
When developing macroeconomic models, economists change their focus from the relationship between consumption and disposable income to the relationship between consumption and ______.
real GDP
Any factor that leads businesses to collectively expect lower rates of return on their investments _____.
reduces investment demand
Businesses invest in capital goods that are expected to make a(n) _______
return
If firms are planning to increase their inventories, the investment demand curve shifts to the
right
If production technology improved, the investment demand curve would shift to the ______ because increased efficiency ______ production costs.
right, reduces
In terms of the investment demand curve, an increase in demand is represented by a(n) ______ shift and a decrease in demand is represented by a(n) ______ shift.
rightward, leftward
When acquisition, maintenance, and operating costs _____ , the expected rate of return from prospective investment projects declines.
rise
In the figure, marginal propensity to ______ equals 5 divided by 20.
save
Lower interest rates diminish the incentive to what?
save
According to the table,___________ is $30 billion when disposable income is $510 billion.
saving
The marginal propensity to save is equal to a change in ____(One word) divided by a change in income.
savings
If household expectations are of a recession and thus lower income in the future, what will happen to the consumption schedule?
shift down
As a result of the multiplier effect, a change in ultimately changes output and income by more than the initial change. _____ (Enter only one word.)
spending
The economy supports repetitive, continuous flows of ______ and income through which dollars spent by Smith are received as income by Chin and then spent by Chin and received as income by Gonzales, and so on.
spending
The consumption and saving schedules are relatively ______ due to long-term decisions and non-income determinants working in opposite directions.
stable
The multiplier formula
the multiplier
The nominal interest rate minus the rate of inflation equals what?
the real interest rate
If disposable income increases from $410 to $430 billion and savings increases from $5 to ______ billion, the marginal propensity to save is 0.25.
$10
Based on the table, an initial investment of $5 results in a change in consumption of _____.
$15
According to the table, when disposable income is $470 billion, what is the savings?
$20
In the figure, what is the break-even level of disposable income?
$390 billion
If marginal propensity to consume equals 0.6 and the change in income is $12 billion, what is the change in consumption?
$7.2 billion
A business is considering investment in a new machine. The machine costs $1,000 and the real interest rate is 7%. What is the interest cost?
$70
Which of the following are determinants of household consumption and savings?
- wealth - interest rates - borrowing
If saving is $30 billion and disposable income is $510 billion, what is average propensity to save (APS)?
0.06
Based on the figure, what is the marginal propensity to save?
0.25
When the multiplier is 4, the marginal propensity to save (MPS) is ______.
0.25
The sum of MPC and MPS equals ______
1
The direct relationship between MPC and the multiplier is shown in the following equation:
1/(1-MPC)
The owner of a manufacturing company is considering whether or not to invest in a new sanding machine that costs $1,000. Net expected revenue after installation of the machine is $1,100. What is the expected rate of return?
10%
A business is deciding whether or not to invest in new equipment. The new equipment costs $10,000, annual income from the use of the equipment is expected to be $11,000 and the annual interest cost is $1,500. The interest rate for this investment is _______%. (Enter a number.)
15%
If the change in real GDP is $90 billion and the initial change in spending is $30 billion, the multiplier is:
3.00
If the marginal propensity to save is 0.25, what is the multiplier?
4
When the initial change in spending is $20 billion and the resulting change in GDP is $80 billion, the multiplier is .______ (Enter only a numerical value.)
4
What does the multiplier explain?
An increase or decrease in GDP
Borrowing affects consumption because, when a household borrows, it can increase current consumption beyond what would be possible if its spending were limited to its disposable income. What will result regarding the current consumption schedule?
An upward shift
Why does an increase in business taxes shift the investment demand curve to the left?
Because the expected profitability of investments declines
The marginal ______ of investment is the expected rate of return.
Benefit
______ goods have indefinite lifespans because of their durability.
Capital
______ is relatively stable in comparison to investment spending.
Consumption spending
Which of the following may be reasons for substantial shifts in business expectations?
Court decisions in key labor or antitrust cases Changes in exchange rates Changes in trade barriers
Which of the following represents innovations that created a "wave" of investment spending?
Electricity Railroads Cell phones
A movement along the consumption schedule represents a change in the amount consumed and is solely caused by a change in real _________
GDP
Consumption is positively related to disposable______________
Income
Which of the following two variables change by more than an initial change in spending due to the multiplier effect?
Income output
Most of the fluctuations in output and employment over time are due to changes in what?
Investment
What is the most volatile component of total spending?
Investment
Which of the following has historically had the greatest swings in spending?
Investment
_____ expenditure is the most volatile component of total spending.
Investment
Changes to which of the following lead to the multiplier effect?
Investment Government spending Net exports Consumption
A large ______ causes increases in consumption to decline slowly resulting in a cumulative large change in income.
MPC
Disposable income minus consumption equals:
Savings
What needs to be weighed against the expected rate of return when making investment decisions?
The interest rate
Which of the following shows the relationship between the amount of investment and the interest rate?
The investment demand curve
True or false: A firm's current profits affect both the firm's incentive and ability to invest.
True
A large MPC causes increases in consumption to decline slowly resulting in:
a cumulative large change in income
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
Households can consume more than their current incomes by liquidating accumulated wealth or by_______________
borrowing
Which of the following causes the consumption schedule to shift upward?
borrowing by households
Households can consume more than their current incomes by ______.
borrowing from a bank liquidating wealth
In the figure, an increase in acquisition, maintenance, and operating costs affects the investment demand curve _____.
by shifting it from ID0 to ID2
In general, businesses purchase ______ only if they expect them to be profitable?
capital goods
he marginal ________ of investment is the interest rate paid for borrowed funds.
cost
In theory, if business taxes _____, investment increases.
decrease
Any factor that leads businesses to collectively expect lower rates of return on their investments ______ investment demand.
decreases
Innovations induce a large wave of investment spending that in time ultimately ______.
decreases
The consumption schedule reflects the_____________ relationship between consumption and disposable income.
direct
The relationship between spending and GDP is?
direct
There is a(n) _______ relationship between spending and GDP.
direct
Dissaving will occur at low ______ levels.
disposable income
True or false: The consumption schedule reflects the indirect relationship between consumption and disposable income
false
True or false: The investment demand curve shows the amount of investment forthcoming at each nominal interest rate.
false
True or false: The multiplier works both ways. It can explain an increase or decrease in GDP.
false
Following an initial change in spending, the multiplier effect creates a chain of spending in which each successive link, or expenditure, is ______ the previous link.
fractionally smaller than
"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
Increases in investment demand occur when businesses collectively expect:
greater rates of return on their investments
At best, lower interest rates shift the consumption schedule slightly ______ and the saving schedule slightly ______.
higher; lower
Households' expectations of rising prices tomorrow may trigger more spending and less saving today. This is an example of the impact of ______.
household expectations
Spending on ______ drains off some of the additional consumption created by the increases in income.
imports taxes
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
When a business plans to ______ its inventory, the investment demand curve shifts to the left.
lower
The economic term for "extra" or "a change in" is:
marginal
A business purchases a new piece of equipment. Another firm earns income from this sale and with this income builds a new factory. The contractor that built the factory earns income and uses the income to take a vacation. The resort earns income from the contractor. This scenario describes the:
multiplier effect
When making an investment decision, the inflation rate should be subtracted ______ from the interest rate to find the real rate of interest.
nominal
The MPC plus the MPS equals:
one
A shift of the investment demand curve from ID0 to ID2 is explained by ______ business expectations.
pessimistic
A business is thinking about investing in a new piece of equipment. The expected _____ of return helps the business make the decision about whether or not to invest.
rate
A business is thinking about investing in a new piece of equipment. The expected _______ of return helps the business make the decision about whether or not to invest.
rate
Which type of interest rate is used to make investment decisions?
real
In the figure, the consumption schedule shifts down when households consume less at each level of ______.
real GDP
If a firm with investment demand of ID0 becomes more optimistic about future sales, costs, and profits, the investment demand curve will ______.
shift to ID1
When households save more, the saving schedule does what?
shift up
What happens to the investment demand curve when there is an increase in demand?
shifts to the right
The _____ of a line is the ratio of the vertical change to the horizontal change taking place by moving from one point to another on that line.
slope
A firm expects slower future sales and reduces inventory. If in reality sales stay brisk, the difference in expected sales and actual sales will be accounted for as ______ inventory changes.
unplanned
Firms often find that the actual amount of inventory investment that they end up having is either greater or less than what they had planned based on expectations of faster or slower sales. This is called their ______ (one word) inventory changes.
unplanned
Firms often find that the actual amount of inventory investment that they end up having is either greater or less than what they had planned based on expectations of faster or slower sales. This is called their _______ (one word) inventory changes.
unplanned
If disposable income increases from $450 to $470 billion and savings increases from $15 to $20 billion, what is the marginal propensity to save (MPS)?
0.25
Based on the figure, what is the marginal propensity to consume?
0.75
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
Referring to the table, if consumption is $405 billion and disposable income is $410 billion, what is the average propensity to consume?
0.99
The average propensity to consume and the average propensity to save together equal _______ (APC+APS=)
1
Comparing the expected rate of return to the real interest rate in deciding whether or not invest is the same as comparing the marginal ________ and marginal _________ .
Benefit, cost
What happens to the consumption schedule and the saving schedule as a result of a change in taxes?
Both the saving schedule and the consumption schedule shift in the same direction.
__________ -_____________ income is the income level at which households plan to consume their entire incomes.
Break-even
Referring to the table, if consumption is $495 billion and disposable income is $530 billion, the _______ propensity to consume is 0.93.
average
The ______ propensity to consume is the fraction or percentage of total income that is consumed.
average
The fraction of total income that is saved equals the ________ propensity to save.
average
________ propensity to save equals saving divided by income.
average
The fraction or percentage of total income that is consumed is called the:
average propensity to consume (APC)
Total consumption divided by total disposable income equals the ______.
average propensity to consume (APC)
The fraction of total income that is saved is called the:
average propensity to save
What does saving divided by income equal?
average propensity to save (APS)
Average propensity to consume equals total________ divided by total disposable income.
consumption
Dissaving is__________ when is greater than after-tax income.
consumption
Marginal propensity to consume is the slope of what schedule?
consumption
Saving equals disposable income minus
consumption
The figure shows that the marginal propensity to consume is a change in ____ divided by a change in disposable income.
consumption
When household savings ______, the saving schedule shifts down.
decrease
"Break-even income" is the level of ______ at which households plan to consume all their income.
disposable income
What is the primary factor that determines the amounts that households will consume and save?
disposable income
Households generally consume a portion and save a portion of additional ______ resulting from ______, causing both the consumption and saving functions to shift upward.
disposable income; lower prices
In economic terms ______ means "extra" or "a change in".
marginal
The change in consumption divided by the change in income is equal to the ______ propensity to consume.
marginal
A change in saving divided by a change in income is equal to the
marginal propensity to save
The slope of the savings schedule is the
marginal propensity to save
Borrowing in the present allows for higher consumption in the present and necessitates lower consumption in the future when the debts must be repaid. This is an example of what economic concept?
no free lunch
The consumption and saving schedules move in _______ directions when influenced by wealth, expectations, debt, and/or interest rates.
opposite
Consumption and disposable income have what kind of relationship?
positive
A movement along a consumption schedule represents a change in the amount consumed and is solely caused by a change in ______.
real GDP
Lower interest rates ______ the incentive to save.
reduce
if ________ is $15 billion and disposable income is $450 billion, the average propensity to save is 0.03. (Enter only one word in the
savings
The marginal propensity to consume is the ______ of the consumption schedule.
slope
The ratio of the vertical change to the horizontal change taking place by moving from one point to another along the line is called what?
slope
If household consumption is originally at C0, but households then decide to consume more at each level of real GDP, the consumption schedule shifts to the ________ curve on the graph.
upward
A household's ______ is the dollar amount of all the assets that it owns minus the dollar amount of its liabilities.
wealth
In the late 1990s, skyrocketing US stock values expanded the value of household assets. This is an example of the ________ effect
wealth
The dollar amount of all the assets that a household owns minus the dollar amount of its liabilities is called:
wealth
Events sometimes boost the value of existing wealth, shifting the consumption schedule upward and the saving schedule downward. This is called what?
wealth effect
The ratio of a change in consumption to a change in the income that caused the consumption change is called the
Marginal propensity to consume
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
What happens as a result of changes in wealth, expectations, interest rates, and household debt?
The consumption schedule shifts in one direction, and the saving schedule shifts in the opposite direction.
