# Chapter 11- Income and Expenditure

What type of spending depends primarily on these three factors: the interest rate, the expected future level of real GDP, and the current level of production capacity?

planned investment spending

actual investment spending

actual consumer spending

unplanned inventory investment
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Thankfully, the recession is very short and consumer spending on Kitty Chow increases to prerecession levels.
What is most likely to occur first at Kitty Chow firms during this period of recovery?

Firms will sell off excess inventories before returning to increased production levels.

Firms will immediately increase production to meet increased demand.

Firms will decrease current production to increase the price of Kitty Chow.
The Wilson family has a disposable income of $70,000 annually. Currently, the Wilson family spends 80% of new disposable income on consumption. Assume that their marginal propensity to consume is 0.8 and that their autonomous consumption spending is equal to$10,000.

What is the amount of the Wilson family's annual consumer spending?
Suppose that Kim K decides to spend $30,000 on an American‑made purse instead of donating it to Haitian earthquake relief. Assume that the multiplier is 1.7. How much will GDP rise when Kim K buys her purse according to the multiplier effect? Buying the purse increases America's GDP __________ donating the money to Haitian earthquake relief. Suppose she instead donated to tornado relief in Joplin, MO. Buying the purse increases GDP ______________ spending on tornado relief. Which of the statements best describes the paradox of thrift? Households increase savings during recessions, which causes consumption to fall, aggregate expenditures to fall, and may possibly lead to or make worse a recession. Households decrease saving during a recession, reducing opportunities for business investment. Unlike most retailers, thrift stores tend to have increased profits when the economy is in a recession. Households substitute to thrifty, lower-priced items during a recession, causing aggregate expenditures to fall. Income and consumption changes for five people are shown in the table. Given this information, rank the marginal propensities to consume (MPC) for the five people from largest to smallest. Name. Income change. Consumption Andrew. +$10,000. +$6,000 Barry +$5,000 +$1,600 Colin +$2,000 +$1,600 Dan −$5,000 −$3,500 Ed −$10,000 −\$4,000