Chap 8 - Basic Macroeconomic Relationships ANSWERS TO...

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Basic Macroeconomic Relationships ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 Very briefly summarize the relationships shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment demand curve, and (d) the multiplier effect. Which of these relationships are direct (positive) relationships and which are inverse (negative) relationships? Why are consumption and saving in the United States greater today than they were a decade ago. (a) The consumption schedule or curve shows how much households plan to consume at various levels of disposable income at a specific point in time, assuming there is no change in the nonincome determinants of consumption, namely, wealth, the price level, interest rates, expectations, indebtedness, and taxes. A change in disposable income causes movement along a given consumption curve. A change in a nonincome determinant causes the entire schedule or curve to shift. (b) The saving schedule or curve shows how much households plan to save at various levels of disposable income at a specific point in time, assuming there is no change in the nonincome determinants of saving, namely, wealth, the price level, interest rates, expectations, indebtedness, and taxes. A change in disposable income causes movement along a given saving curve. A change in a nonincome determinant causes the entire schedule or curve to shift. (c) The investment demand curve shows how much will be invested at all possible interest rates, given the expected rate of net profit from the proposed investments, assuming there is no change in the noninterest-rate determinants of investment, namely, acquisition, maintenance, operating costs, business taxes, technological change, the stock of capital goods on hand, and expectations. A change in any of these will affect the expected rate of net profit and shift the curve. A change in the interest rate will cause movement along a given curve. (d) The multiplier effect shows how an initial change in spending can flow through the system to generate a larger change in GDP. C o n s u m p t i o n a n d s a v i n g a r e d i r e c t l y ( p o s i t i v e l y ) related to income. Investment is inversely (negatively) related to the real interest rate. The multiplier directly relates changes in spending to changes in GDP. C o n s u m p t i o n a n d s a v i n g a r e g r e a t e r t o d a y p r i m a r i l y because income is greater. Note that this does not necessarily mean that per capita consumption and saving have risen; both GDP and population have risen over the past decade. 8-2 Precisely how do the APC and the MPC differ? Why must the sum of the MPC and the MPS equal 1? What are the basic determinants of the consumption and saving schedules? Of your personal level of consumption? A P C i s a n a v e r a g e w h e r e b y t o t a l s p e n d i n g o n c o n s umption (C) is compared to total income (Y): APC = C/Y. MPC refers to changes in spending and income at the margin. Here we compare a change in consumer spending to a change in income: MPC = change in C / change in Y.
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Chap 8 - Basic Macroeconomic Relationships ANSWERS TO...

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