Deck 10: Part A: Basic Macroeconomic Relationships

Question 1

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

Answer 1

The average propensity to consume is defined as the relationship between the amount consumed relative to the level of income; it is (consumption)/(income).The marginal propensity to consume is a measure relating the change in consumption resulting from a change in income to that change in income; it is (change in consumption)/(change in income).

Question 2

Describe the relationship shown by the investment demand curve.

Answer 2

The investment demand curve relates investment to the real rate of interest and the expected rate of return.Graphically the interest rate and expected rate of return are measured on the vertical axis and the amount of investment is measured on the horizontal axis.The investment demand curve has a negative slope reflecting the inverse relationship between the interest rate (the price of investing) and the aggregate quantity of investment goods demanded.

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

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

Question 5

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

Question 6

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

Question 7

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 8

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

Question 9

Define the consumption and saving schedules.

Question 10

List four factors that could shift the current consumption schedule.

Question 11

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

Question 12

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

Question 13

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 14

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 15

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

Question 16

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 17

Explain how consumption and saving are related to disposable income.

Question 18

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 19

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 20

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

Question 21

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 22

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

Question 23

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 24

Explain the economic impact of an increase in the multiplier.

Question 25

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 26

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