MacroEcon Chapter 12
If the MPC = 0.8, a permanent increase in planned real investment of $40 billion will increase real GDP by a total of
$200 billion
If the MPC = 0.9, the multiplier equals
10
Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the ___________ reference line. At that level of real GDP per year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.
45-degree
What does not cause the investment function to shift?
A change in the rate of interest
Dissaving
A negative saving: a situation in which spending exceeds income; can occur when a household is able to borrow or use up existing assets
Lump-sum tax
A tax that does not depend on income.
Life-cycle theory of consumption
A theory in which a person bases decisions about current consumption and saving on both current income and anticipated future income.
Permanent Income Hypothesis
A theory of consumption in which an individual determines current consumption based on anticipated average lifetime income.
APC formula
APC = real consumption / real disposable income
APS formula
APS = real saving / real disposable income
How to you calculate a change in equilibrium GDP?
Change in equilibrium real GDP = multiplier x change in autonomous spending
What are the 2 things you can do with a dollar of disposable income?
Consume it or Save it.
T/F Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income.
False
T/F The larger the MPS, the larger the multiplier.
False
T/F The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.
False
Consumption goods
Goods bought by households to use up, such as food and movies.
_________ is also a flow. It includes expenditure on new machines, buildings, and equipment and in business inventories.
Investment
MPC formula
MPC = change in real consumption / change in real disposable income
MPS formula
MPS = change in real saving / change in real disposable income
What is the multiplier formula?
Multiplier = 1/1-MPC = 1/MPS
Capital goods
Producer durables; nonconsumable goods that firms use to make other goods.
Real disposable income
Real GDP minus net taxes, or after-tax real income.
Average propensity to consume (APC)
Real consumption divided by real disposable income. For any given even of real income, the proportion of total real disposable income that is consumed.
Average propensity to save (APS)
Real saving divided by real disposable income. For any given level of real income, the proportion of total real disposable income that is saved.
Investment
Spending on items such as machines and buildings, which can be used to produce goods and services in the future.
Consumption
Spending on new goods and services to be used up out of a household's current income. Whatever is not consumed is saved.
Saving
The act of not consuming all of one's current income. Whatever is not consumed out of spendable income becomes part of this flow.
45-degree reference line
The line along which planned real expenditures equal real GDP per year.
Autonomous consumption
The part of consumption that is independent of (does not depend on) the level of disposable income. Changes in this shift the consumption function.
The investment function is represented as an inverse relationship between the value of planned real investment and
The rate of interest
Marginal propensity to consume (MPC)
The ratio of the change in consumption to the change in disposable income.
Marginal propensity to save (MPS)
The ratio of the change in saving to the change in disposable income. Whatever is not saved is consumed.
Multiplier
The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures.
Consumption function
The relationship between amount consumed and disposable income. It tells us how much people plan to consume at various levels of disposable income.
Net wealth
The stock of assets owned by a person, household, firm, or nation (net of any debts owed)
T/F Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.
True
T/F Because of the multiplier effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.
True
T/F Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.
True
T/F In the United States, resourse-using federal government expenditures account for almost 20 percent of real GDP.
True
T/F The difference between real exports and real imports is called real net exports.
True
T/F When including consumption, investment, government expenditures, and net exports, the equilibrium level of real GDP is found at the intersection of the C + I + G + X curve and the 45-degree reference line.
True
With respect to real GDP, planned investment is autonomous and is therefore represented graphically as
a horizontal line
For simplicity, we assume that real investment is _______ with respect to real GDP and therefore unaffected by the level of real GDP per year.
autonomous
We assume that the consumption function has an ________ part that is independent of the level of real GDP per year. It is labeled "_______ consumption".
autonomous; autonomous
The ________ propensity to consume is equal to real consumption divided by real disposable income. The ____ propensity to save is equal to real saving divided by real disposable income.
average; average
The C + I + G + X curve, is drawn with the price level held constant, whereas the AD curve allows the price level to ________. Each different price level generates a new C + I + G + X curve.
change
The AD curve is drawn with the price level ________, and the C + I + G + X curve is drawn with the price level ________.
changing; held constant
The saving function is the __________ of the consumption function.
complement
If actual saving exceeds planned investment, all of the following will occur except
consumers will purchase more goods than had been anticipated by businesses.
How do you calculate disposable income?
disposable income = consumption + saving
The consumption function shows the relationship between planned rates of real consumption and real _______ per year. The saving function is the complement of the consumption function because real saving plus real ________ must equal real disposable income.
disposable income; consumption
The ______ level of real GDP can be found where planned savings equals planned investment.
equilibrium
The non-interest-rate determinants of planned investment are _________, innovation and technological changes, and _____________.
expectations; business taxes
T/F If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $400 saved.
false
The planned investment schedule shows the relationship between real investment and the ________; it slopes _________.
interest rate; downward
The __________ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income. The _________ propensity to save is equal to the change in planned real saving divided by the change in real disposable income.
marginal; marginal
The multiplier is equal to 1 divided by the ________ propensity to __________ .
marginal; save
Any change in autonomous spending shifts the expenditure curve and causes a __________ effect on equilibrium real GDP pear year.
multiplier
When we add autonomous investment, I, and autonomous government spending, G, to the consumption function, we obtain the C + I + G curve, which represents total ___________ for a closed economy. In an open economy, we add the foreign sector, which consists of exports minus imports, or net exports, X. Total planned expenditures are thus represented by the C + I + G + X curve.
planned expenditures
The smaller the marginal propensity to _________, the larger the multiplier. Otherwise stated, the larger the marginal propensity to __________, the larger the multiplier.
save; consume
How do you calculate saving?
saving = disposable income - consumption
_______ is a flow, something that occurs over time. It equals disposable income minus consumption. In contrast ________ are a stock. They are the accumulation resulting from saving.
saving; savings
What is not a flow concept?
savings
Any change in the non-interest-rate determinants of planned investment will cause a _______ the planned investment function so that at each and every rate of interest a different amount of planned investment will be made.
shift in
For any given level of real income, the proportion of total real disposable income that is consumed is called
the average propensity to consume
T/F At any point where the consumption function intersects the 45-degree reference line C = Y.
true