Exam 3: Macro Economics
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.
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?
Change in consumption (1500-1000) divided by change in disposable income ((1500-200)-(1000-100)) MPC = .8
Suppose that the linear equation for consumption in a hypothetical economy is: C = 40 + 0.8Y Also suppose that income (Y) is $400. Determine the values for the following: MPC= MPS= Consumption= APC= Savings= APS=
MPC= .8 MPS= 1-MPC(.8)=.2 Consumption= 40 + .8(400)=$360 APC= C/DI = 360/400=0.9 Savings= DI-C = 400-360=$40 APS= S/DI= 40/400=0.1
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.
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 because the expected rate of return exceeds the borrowed rate.
True or False: Real GDP is more volatile (variable) than gross investment.
false
If the MPS rises, then the MPC will:
fall. MPC + MPS = 1
A large decrease in real estate values, including private homes.
shifts the consumption schedule down and savings schedule up
A sharp, sustained increase in stock prices.
shifts the consumption schedule up and the savings schedule down
A substantial increase in household borrowing to finance auto purchases.
shifts the consumption schedule up and the savings schedule down
An economy-wide expectation that a recession is over and that a robust expansion will occur.
shifts the consumption schedule up and the savings schedule down
Consumption schedule
y-axis- consumption x-axis- disposable income direct relationship
Savings schedule
y-axis- savings x-axis- disposable income direct relationship
