# Basic Macroeconomic relationships

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 As disposable income increases, consumption and savings both increase The relationship between consumption and disposable income is such that a direct and relatively stable relationship exist between consumption and income If the MPC is .8 and disposable income is 200\$ then consumption and savings can not be determined from this information The MPC for an economy is the slope of the consumption schedule or line in contrast to investment, consumption is relatively stable which of the following will cause a movement down along an economies consumption schedule. a decrease in disposable income at the point where the consumption schedule intersects the 45 degree line The APC is 1.00 Teesas break even income is 10,000 and her MPC is .75. If her actual income is 16,000 her level of consumption spending will be 14500 If trents MPC is .80 this means that he will spend eight tenths of any increase in his disposable income Suppose a familys consumption exeeds its disposable income. This means that APC is greater than 1 one can determine the amount of any level of total income that is consumed by multiplying total income by the APC Which of the following is correct MPC+MPS=APC+APS Dissaving means The households are spending more than their current incomes Dissaving occurs when consumption exeeds income Which of the following relations is not correct MPS=MPC+1 The savings schedule is drawn on the assumption that as income increases Savings will increase absolutely and as a percentage of income At the point where the consumption schedule intersects the 45 degree line Savings is 0 the saving schedule is such that as aggregate income increases by a certain amount, saving increases, but by a smaller amount If the consumption schedule is linear, then the Savings schedule will also be linear GIven the consumption schedule, it is possible to graph the relevant savings schedule by Plotting the vertical differences between the consumption schedule and the 45 degree line the marginal propensity to consume is .9 then the marginal propensity to save must be .1 The greater the marginal propensity is the smaller is the marginal propensity to save if the savings schedule is a straight line MPS must be constant which of the following will cause a movement up along an economies saving schedule an increase in disposable income in the late 1990’s the U.s stock marked boomed causing U.S consumption to rise. Economist refer to this outcome as Wealth effect The wealth effect is shown graphically as a shift of the consumption schedule An upward shift of the savings schedule suggest That the APC has decreased and the APS has increased at each GDP leve Which of the following will not shift the consumption schedule upward the expectation of a future decline in the consumer index If the consumption schedule shift upwards and the shift was not caused by a tax xhange, the savings schedule will shift downward Which of the following will not cause the consumption schedule to shift a change in consumers income When consumption and savings are graphed relative to REAL GDP, an increase in personal taxes will shift Both the consumption schedule and the savings schedule downwards If for some reasons households become increasingly thrifty, we could show this by an upward shift in the savings schedule Assume the economies consumption and savings schedule simultaneously shift downward. This must be a result of an increase in personal taxes The investment demand slopes downwrd and to the right because lower real interest rates enable more investment project to be undertaken profitably The invest ment demand curve portrays an inverse (negative ) relationship between The real interest rate and investment Other things equal, a decrease in the real interest rate will move the economy downward along its existing investment demand curve the relationship between the real interest rate and investment is shown by the investment demand schedule Given the expected rate of return on all possible investment opportunities in the economy An increase in the real rate of interest will reduce level of investment A decline in real interest rates will increase the amount of investment spending The immediate determinants of invesment spending are the expected rate of return on capital goods and the real interest rate The investment demand curve suggest that There is an inverse relationship between the real rate of interest and the level of investment spending If business taxes are reduced and the real interest rate increases the level of investment spending might either increase or decrease Other thing equal, a 10 percent decrease in cooperate income taxes will shift the investment demand curve to the right The investment curve will shift to the right as a result of Business becoming more optimistic about future business conditions Other thing equal, f the real interest rate falls and business taxes rise we will be uncertain as to the resulting change in investment the investment demand curve will shift to the right as a result of Technological programs The investment demand curve will shift to the left as a result of an increase in the exess production capacity available in industry If the real interst rate in the economy is (i) and expected rate of return from additional investment is (r), then more investment will be forthcoming when r is greater than i a rightward shift of the investment demand curve might be caused by Business planning to increase their stock of inventories The real interest rate is The percentage increase in purchasing power that the lender receives on a loan When we draw an investment demand curve, we hold consistant all of the following except the interest rate If nominal interest rate is 18 percent and the real interest rate is 6 percent the inflation rate is 12 percent If the inflation rate is 10 percent and the real interest rate is 12 percen, the nominal interest rate is 22 percetn A high rate of inflation is likely to cause a high nominal interest rate If the real interest rate in the economy is (i) and the expected rate of return on additional investment is r, then other things equal r will fall as more investment is undertaken In annual percentage terms, investment spending in the united states is more variable than REAL GDP Investment spending in the United States tends to be unstable because all of these contribute to instability Investment spending in the United States tends to be unstable because profits are highly variablw the mulitplier effect means that an increase in investment can cause GDP to change by a larger amount The multiplier is 1/MPS The Multiplier is useful in determining change in real GDP resulting from a change in spending The Multiplier is defined as change in GDP/Initial change in spending If 100 percent of any change in income is spent, the multiplier will be infinitely large the multiplier can be calculated by 1(1-MPC) the size of the multiplier is equal to the Reciprocal of the slope of the saving schedule If the MPS is only half as large as the MPC, the multiplier is 3 If the MPC is .70 and investment increases by 3 billion the equilibrium will increase by 10 billion The numerical value of the multiplier will be smaller the larger the slope of the saving schedule the practical significance of the multiplier is that magnifies initial change in spending into larger changes in GDP If the MPC is .6 the multiplier will be 2.5 Assume the MPC is 2/3. If investment spending increase by 2 billion the level of GDP will increase by 6 billion

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