Deck 10: A: Basic Macroeconomic Relationships

Question 1

List six events that could cause a shift in the investment demand curve to the right.

Answer 1

The investment demand curve would shift to the right if the cost of acquiring, operating, or maintaining capital goods declined; business taxes decreased; a technological change favoring new investment occurred; the stock of capital goods on hand relative to sales decreased; firms' decided to increase inventories; or expectations about higher future profits from investment increased.

Question 2

Define the consumption and saving schedules.

Answer 2

In the aggregate expenditures model one focus is on the consumption schedule which is the relationship between the consumption part of aggregate expenditures and disposable income.Graphically this relationship is illustrated with consumption measured on the vertical axis and disposable income measured on the horizontal axis.If the two were equal, the relationship would follow a straight line along the 45-degree line.Historical data and the aggregate expenditures model suggest that it is a direct relationship, and that households spend a larger proportion of a small income than of a large disposable income.In other words, consumption as a proportion of income falls as disposable income increases.
Since saving is the difference between disposable income and consumption spending, the saving schedule also shows a direct relationship between saving and disposable income.Graphically, it is depicted with saving on the vertical axis and disposable income measured on the horizontal axis.At very low income levels, dissaving is believed to occur and saving increases proportionally as income rises.

Question 3

Suppose a family's annual disposable income is $8,000 of which it saves $2,000.(a) What is their APC?
(b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS and MPC?
(c) Did the family's APC rise or fall with their increase in income?

Answer 3

(a) APC = .75 ($6,000/$8,000).
(b) MPS = .4 ($800/$2,000); MPC = .6 (1 - .4).
(c) APC fell to.72 ($7,200/$10,000).

Question 4

What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions?

Question 5

Complete the accompanying table. (a) What is the break-even level of income? How is it possible for households to dissave at very low income levels?
(b) If the proportion of total income consumed decreases and the proportion saved increases as income rises, explain how the MPC and MPS can be constant at various levels of income.

Question 6

Use the following data to answer the questions. (a) Explain why this table is essentially an investment demand schedule.(b) If the interest rate was 8%, how much investment would be undertaken?
(c) Why is there an inverse relationship between the rate of interest and the amount of investment?

Question 7

Explain how consumption and saving are related to disposable income.

Question 8

State four factors that explain why investment spending tends to be unstable.

Question 9

Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.

Question 10

Complete the accompanying table. Using the below graphs, show the consumption and saving schedules graphically. (b) Locate the break-even level of income.How is it possible for households to dissave at very low income levels?
(c) If the proportion of total income consumed decreases and the proportion saved increases as income rises, explain both verbally and graphically how the MPC and MPS can be constant at various levels of income.

Question 11

List four factors that could shift the current consumption schedule.

Question 12

What is the effect of increase in wealth on the consumption and saving schedules?

Question 13

Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all saving is personal saving.

Question 14

Use the graphs below to answer the following questions: (a) What types of schedules do graphs A and B represent?
(b) If in graph A line A2 shifts to A3 because households consume more and this change is not due to changing taxes, then what would happen to line B2 in graph B?
(c) If in graph B, line B2 shifts to B1 because households save less, then what will happen to line A2 in graph A?
(d) In graph A, what has caused the movement from point A to point B on line A2?
(e) If there is a lump-sum tax increase causing line A2 to shift to A1, then in graph B, what will happen to B2?

Question 15

Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and all saving is personal saving.

Question 16

Describe the relationship between the Great Recession of 2008-2009 and the Investment Riddle.

Question 17

Suppose that the linear equation for consumption in a hypothetical economy is C = 50 + 0.9 Y.Also suppose that income (Y) is $400.Determine the following: (a) MPC; (b) MPS; (c) level of consumption; (d) APC; (e) APS.

Question 18

Differentiate between the average propensity to consume and the marginal propensity to consume.

Question 19

Describe the relationship shown by the investment demand curve.

Question 20

Describe the relationship between the Great Recession of 2008-2009 and the Paradox of Thrift.

Question 21

Define the multiplier.How is it related to real GDP and the initial change in spending? How can the multiplier have a negative effect?

Question 22

Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?

Question 23

What are the relationships between the multiplier and the marginal propensities to consume and save?

Question 24

Most economists regard investment demand as being less stable than the income-consumption relationship.Looking at the determinants of the two relationships, support this contention.

Question 25

What are two key facts that serve as the rationale for the multiplier effect?

Question 26

Explain the economic impact of an increase in the multiplier.