Macroeconomics: Chapter 27

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45 degree line

A line along which the value of GDP (measured horizontally) is equal to the value of aggregate expenditures (measured vertically).

consumption schedule

A schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income.

Saving schedule

A schedule that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.

Break-even income

The level of disposable income at which households plan to consume (spend) all their income and to save none of it.

Average propensity to consume (APC)

Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income.

Average propensity to save (APS)

Fraction (or percentage) of disposable income that households save; saving divided by disposable income.

Marginal propensity to consume (MPC)

The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.

Marginal propensity to save (MPS)

The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income.

Wealth effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.

Expected rate of return

The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (or R&D) activity.

Investment demand curve

A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.

Multiplier

The ratio of a change in the equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in the equilibrium GDP.

Paradox thrift

is an analysis of Keynesian economics that illustrates fundamental differences between macroeconomics and microeconomics.

Disposable income equals

Consumption plus savings

As disposable income decreases, consumption:

and savings both decrease.

Refer to the above graph. At income level 3, the amount of saving is represented by the line segment:

FG

Refer to the above graph. At income level 3, the amount of consumption is represented by the line segment:

GH

Refer to the above graph. At income level 1, the amount of income is represented by the line segment:

AB

Refer to the above graph. Disposable income equals consumption at point:

D

Refer to the above graph. At income rises from level 1 to level 2, the amount of:

Consumption increases and the amount of disssaving decreases.

Refer to the abaove graph. As income falls from level 3 to level 2, the amount of:

Consumption decreases and the amount of savings decreases.

The fraction, or percentage of total income which is consumed is called the:

Average propensity to consume.

If disposable income is $900 billion when the average propensity to consume is 0.9, it can be concluded that:

Saving is $90 billion.

The MPC can be defined as the:

Change in consumption divided by the change in income.

If you know that an increase in a household's disposable income from $35,000 to $45,000 leads to an increase in consmption from $30,000 to $38,000, then you can conclude that the:

Marginal propensity to consume is .8

The relationship between the MPS and the MPC is such that:

1 - MPC = MPS

Which would shift the saving schedule upward?

A decrease in wealth.

As the consumption and saving schedules relate to real GDP, an increase in taxes will shift.

Downward both the consumption and saving schedules.

What is the likely effect of a fall in real interest rates on consumption and saving in the best of circumstances?

The consumption schedule shifts upward slightly and the saving schedule shifts downward slightly.

A lower real interest rate typically induces consumers to:

Purchase more goods that are bought using credit.

Refer to the above data. A the $300 level of idsposable income:

There is a dissaving of $10

Refer to the above data. If disposable income is $550, we would expect consumption to be:

$460

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,00. The expected rate of return from this new computer software is:

25 percent

Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is:

$10 billion

Refer to the above talbe. The marginal propensity to consume is:

.75

Refer to the above table. the marginal propensity to save is:

.25

Refer to the above table. The mulitplier in this eocnomy is:

4

Refer to the above table. the total change in income resulting from the initial change in investment will be:

$20

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