businesses becoming more optimistic about future business conditions.
  • Investment spending in the United States tends to be unstable because:
  • The investment demand curve will shift to the right as the result of:
  • The investment demand curve will shift to the left as a result of:
  • The investment demand slopes downward and to the right because lower real interest rates:
change in GDP/initial change in spending.
  • The multiplier is defined as:
  • The multiplier applies to:
  • The consumption schedule shows
  • The MPC for an economy is:
Answer: c. 0.80.Adam's MPC out of his $500 raise is 0.That is true because when Adam's income goes up by a marginal (extra) $500, his consumption goes up by a marginal (extra) $Those numbers allow us to calculate the MPC as: MPC = (change in consumption) / (change in income)Substituting Adam's values into the formula tells us that MPC = 0.80 (= $400/$500). If you are confused about Adam's marginal consumption going up by exactly $400, think about how much he was consuming in each year. To do so, remember that any money that is not saved is by definition consumed. So when Adam saves $100 in year 1 out of an income of $1,000, he must be consuming $900 (= $1,000 - $100) that year. In the same way, when he is saving $200 out of an income of $1,500 in year 2, he must be consuming $1,300 (= $1,500 - $200).Looking at those two consumption numbers, we see that Adam's consumption rises from $900 in year 1 to $1,300 in year 2, which is a $400 increase. And because that $400 increase came in response to a $500 increase in pay, we know that his MPC out of that $500 increase in pay is 0.80.
  • 6. Which of the following scenarios will shift the investment demand curve right? LO4a. Business taxes increase.b. The expected return on capital increases.c. Firms have a lot of unused production capacity.d. Firms are planning on increasing their inventories.
  • 4. In what direction will each of the following occurrences shift the investment demand curve, other things equal? LO4a. An increase in unused production capacity occurs.b. Business taxes decline.c. The costs of acquiring equipment fall.d. Widespread pessimism arises about future business conditions and sales revenues.e. A major new technological breakthrough creates prospects for a wide range of profitable new products.
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • 2. In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise? LO1a. 0.50.b. 0.75.c. 0.80.d. 1.00.
level of income
  • The investment demand curve will shift to the right as the result of:
  • The relationship between consumption and disposable income is such that:
  • If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:
  • The most important determinant of consumption and saving is the:
22 percent.
  • . If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
  • Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter's example? LO5
  • In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
  • During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that:
Answer: The actual multiplier (estimated to be about 2) is smaller because it includes other leakages from the spending and income cycle besides just saving. Imports and taxes reduce the flow of money back into spending on domestically produced output, reducing the multiplier effect.
  • . If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
  • (Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how:
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter's example? LO5
the investment demand curve shifted inward.
  • When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
  • In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
  • During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that:
  • . If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
Answer: True: This statement is true because larger MPCs do imply larger multipliers.The intuition is that with a larger MPC, you will see larger amounts of consumption in each round of the multiplier process. To see why, consider two different MPCs, 0.5 and 0.If there is an initial $1 increase in spending in the economy and the MPC is only 0.5, the first three rounds of the multiplier process will be $1.00, $0.50, and $0.By comparison, if the MPC is 0.9, the first three rounds of the multiplier process will be $1.00, $0.90, and $0.What we see is that starting with the second round, the numbers are much larger when the MPC is 0.As a result, the total cumulative change in GDP over all rounds of the multiplier process is also going to be much larger when the MPC is 0.Generalizing from this specific example, we see that higher MPCs imply higher multipliers.
  • 6. Which of the following scenarios will shift the investment demand curve right? LO4a. Business taxes increase.b. The expected return on capital increases.c. Firms have a lot of unused production capacity.d. Firms are planning on increasing their inventories.
  • 9. True or False. Larger MPCs imply larger multipliers. LO5
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • 2. In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise? LO1a. 0.50.b. 0.75.c. 0.80.d. 1.00.
$60.
  • When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
  • The consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. At an $800 level of disposable income, the level of saving is:
  • The consumption schedule shows
  • If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:
Answer: The two scenarios in which the investment demand curve will shift right are: the expected return on capital increases and firms are planning on increasing their inventories.The investment demand curve will shift right in only two of the scenarios: the expected return on capital increases and firms are planning on increasing their inventories. Let's go through the four scenarios one at a time to understand why only those two scenarios are associated with increases in investment demand and rightward shifts of the investment demand curve. If business taxes increase, the amount of profits that firms get to keep after paying taxes will be smaller. That will reduce their incentive to produce output because the returns to producing output will be smaller. Firms will respond by investing less. Hence, the investment demand curve will shift left (rather than right). If the expected return on capital increases, firms will want to invest more in order to capture some of those higher expected returns for themselves. Thus, investment demand would increase and the investment demand curve would shift right. If firms have a lot of unused production capacity, then they will see little point in increasing their capital stock. Thus, investment demand will fall and the investment demand curve will shift to the left (rather than to the right). Finally, if firms are planning on increasing their inventories, then we will see an increase in investment demand because, by definition, an increase in inventories is considered to be an increase in investment. Thus, the investment demand curve will shift to the right
  • 2. In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise? LO1a. 0.50.b. 0.75.c. 0.80.d. 1.00.
  • 4. In what direction will each of the following occurrences shift the investment demand curve, other things equal? LO4a. An increase in unused production capacity occurs.b. Business taxes decline.c. The costs of acquiring equipment fall.d. Widespread pessimism arises about future business conditions and sales revenues.e. A major new technological breakthrough creates prospects for a wide range of profitable new products.
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • 6. Which of the following scenarios will shift the investment demand curve right? LO4a. Business taxes increase.b. The expected return on capital increases.c. Firms have a lot of unused production capacity.d. Firms are planning on increasing their inventories.
investment, net exports, and government spending.
  • The multiplier applies to:
  • The multiplier is defined as:
  • The consumption schedule shows
  • The MPC for an economy is:
a direct and relatively stable relationship exists between consumption and income.
  • The investment demand curve will shift to the right as the result of:
  • The relationship between consumption and disposable income is such that:
  • The investment demand curve will shift to the left as a result of:
  • Investment spending in the United States tends to be unstable because:
the amounts households intend to consume at various possible levels of aggregate income
  • The multiplier applies to:
  • When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
  • The consumption schedule shows
  • The MPC for an economy is:
Answer: If, by definition, all that you can do with your income is use it for consumption or saving, then if you consume less out of any given income, you will necessarily save more. This being so, when your consumption schedule shifts downward (meaning you are consuming less out of any given income), your saving schedule shifts upward (meaning you are saving more out of any given income). The exception is a change in personal taxes. When these change, your disposable income changes, and, therefore, your consumption and saving both change in the same direction and opposite to the change in taxes. If your MPC, say, is 0.9, then your MPS is 0.Now, if your taxes increase by $100, your consumption will decrease by $90 and your saving will decrease by $10.
  • 6. Which of the following scenarios will shift the investment demand curve right? LO4a. Business taxes increase.b. The expected return on capital increases.c. Firms have a lot of unused production capacity.d. Firms are planning on increasing their inventories.
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • 9. True or False. Larger MPCs imply larger multipliers. LO5
  • 2. In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise? LO1a. 0.50.b. 0.75.c. 0.80.d. 1.00.
wealth effect.
  • . If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
  • During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that:
  • In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
  • If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:
increase by $10 billion.
  • In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
  • . If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
  • If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:
  • If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:
Answer: a. This will decrease investment demand causing the investment curve to shift to the left. The increase in unused capacity reduces the need (expected return) for capital.b. This will increase investment demand causing the investment curve to shift to the right. The decrease in business taxes increase after-tax expected returns (which determines investment decisions).c. This will increase investment demand causing the investment curve to shift to the right. The expected return increases due to the declining cost.d. This will decrease investment demand causing the investment curve to shift to the left. Widespread pessimism about future business conditions and sales revenues reduces expected returns.e. This will increase investment demand causing the investment curve to shift to the right. The major new technological breakthrough increases expected returns.
  • 6. Which of the following scenarios will shift the investment demand curve right? LO4a. Business taxes increase.b. The expected return on capital increases.c. Firms have a lot of unused production capacity.d. Firms are planning on increasing their inventories.
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
  • 4. In what direction will each of the following occurrences shift the investment demand curve, other things equal? LO4a. An increase in unused production capacity occurs.b. Business taxes decline.c. The costs of acquiring equipment fall.d. Widespread pessimism arises about future business conditions and sales revenues.e. A major new technological breakthrough creates prospects for a wide range of profitable new products.
  • 2. In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise? LO1a. 0.50.b. 0.75.c. 0.80.d. 1.00.
a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
  • Investment spending in the United States tends to be unstable because:
  • The equation C = 35 + .75Y, where C is consumption and Y is disposable income, shows that:
  • (Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how:
  • Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter's example? LO5
consume is two-fifths
  • If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:
  • If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:
  • In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
  • 2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
both the consumption and saving schedules downward.
  • The consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. At an $800 level of disposable income, the level of saving is:
  • The investment demand slopes downward and to the right because lower real interest rates:
  • The consumption schedule shows
  • When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
0:0:1



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