ch.10

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

$250 / $50 = 5.0

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

False: This statement is false because real GDP is actually less volatile than gross investment.

Break -even line

GDP = DI is the same with Consumption and saving is 0

The sum of the MPC and the MPS must equal 1 because

all additional income must be spent or saved.

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

A country's annual growth rates over a 10-year period are shown in the following table.

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

The multiplier effect

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

APC

Income / Consumption

Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. If GDP and consumption both rise by $6 billion in the second round of the process, what is the MPC in this economy? (consumption/income). What is the size of the multiplier? If, instead, GDP and consumption both rose by $8 billion in the second round, what would have been the size of the multiplier?

.6 (= 6/10) 2.5 (= 1/ (1-.6));5 (= 8/10) (consumption/income) then 1-.8 =.2 then 1/.2 =5

Multipliers

1 / MPS 1 / (1-MPC)

MPC

Change in Consumption / Change in Income

MPS

Change in Savings / Change in income

APS

Income / Savings

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

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, idk y

Change in GDP, increase investment by $8 billion and MPC is .80

8 * 1/(1-.8) = 40

Consumption schedule

The variable on the vertical (y) axis is [consumption] and the variable on the horizontal (x) axis is [disposable income]. These variable as [directly] related.

Saving schedule

The variable on the vertical (y) axis is [saving] and the variable on the horizontal (x) axis is [disposable income] These variables are [directly] related.

True or False: Larger MPCs imply larger multipliers.

True

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.

If the MPS rises, then the MPC will:

fall

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 the real interest rate at which it can borrow.

The multiplier is

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