Deck 10: Basic Macroeconomic Relationships

Question 1

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.

Answer 1

(a)MPC = 0.9.(b)MPS = 0.1.(c)At Y = $400,C = $410.(d)At Y = $400,APC = $410/$400 = 1.025.(e)At Y = $400,APS = -$10/$400 = -0.025.

Question 2

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

Answer 2

A movement from one point to another on the consumption schedule is a change in the amount consumed.It is caused solely by a change in disposable income.By contrast,a shift in the consumption schedule is the result of a change in one of the non-income determinates of consumption such as a change in wealth,expectations,borrowing,or real interest rates.If a household decided to consume more at each level of disposable income,the consumption schedule will shift upward.

Question 3

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

Answer 3

Question 4

Describe the relationship shown by the investment demand curve.

Question 5

Explain how consumption and saving are related to disposable income.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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?

Question 12

Use the following data to answer the questions.

Question 13

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 14

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

Question 15

Define the consumption and saving schedules.

Question 16

Complete the accompanying table.

Question 17

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

Question 18

List four factors that could shift the current consumption schedule.

Question 19

Use the graphs below to answer the following questions:

Question 20

Complete the accompanying table.

Question 21

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

Question 22

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 23

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

Question 24

Explain the economic impact of an increase in the multiplier.

Question 25

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 26

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?