Macroeconomics Ch. 10

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A decline in real interest will….

increase the amount of investment spending

An increase in household wealth that creates a wealth effect would shift the:

Consumption schedule upward and the saving schedule downward

The MPC can be defined as that fraction of a:

change in income that is spent.

A firm invests in a new machine that costs $5,000 a year but which is expected to produce an increase in total revenue of $5,200 a year. The current real rate of interest is 7 percent. The firm should:

Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

A high rate of inflation is likely to cause a

high nominal interest rate

The most important determinant of consumption and saving is the

level of income.

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:

12 percent.

In contrast to investment, consumption is:

relatively stable.

Given the expected rate of return on all possible investment opportunities in the economy:

an increase in the real rate of interest will reduce the level of investment.

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:

$6 billion.

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the:

Marginal propensity to save is .25

The consumption schedule shows:

the amounts households intend to consume at various possible levels of aggregate income

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when:

r is greater than i.

1 – MPC = MPS. True


Personal saving is equal to:

Disposable income minus consumption

The multiplier effect indicates that:

a change in spending will change aggregate income by a larger amount.

An MPC value of less than 1.0 indicates that as income increases:

Consumption also increases, though not as much as income

A change in interest rates would shift the consumption schedule and the saving schedule ______; a change in taxes would shift these two schedules ______.

In opposite directions; in the same direction

Generally speaking, the greater the MPS, the:

Smaller would be the increase in income which results from an increase in consumption spending

A rightward shift of the investment demand curve might be caused by:

businesses planning to increase their stock of inventories

Dissaving means

that households are spending more than their current incomes.

Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by:

$20 billion

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