Assignment 5 - 1. (MPC and MPS) If consumption increases by...

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1. (MPC and MPS) If consumption increases by $12 billion when real disposable income increases by $15 billion, what is the value of the MPC? What is the relationship between the MPC and the MPS? If the MPC increases, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function? How do changes in disposable income affect government purchases and the government? 2. (Government Spending) nt purchase function? How do changes in net taxes affect the consumption function? ANS: An increase in disposable income will affect private consumption and investment positively. The government should reduce its investment and spending to control a demand pull inflation, and use the balanced budget policy. The tax income will increase. 3. (Net Exports) What factors are assumed constant along the net export function? What would be the impact on net exports of a change in real disposable income? ANS: Factors held constant along the net export function include the following: The U.S. price level Price levels in other countries Interest rates here and abroad Foreign income levels The Exchange rate between the dollar and foreign currencies A change in one of these factors can shift the net export function. Suppose the value of the dollar decreases relative to foreign currency (fall in the dollar’s exchange value). With the dollar worth less on world markets, foreign products become more expensive for Americans, and U.S. products become cheaper for foreigners.
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exports increase.  Net exports = Exports – Imports increase. 5. (Consumption Function) How would an increase in each of the following affect the consumption function? How would it affect the saving function? a. Autonomous net taxes b. The interest rate c. Consumer optimism or confidence d. The price level ANS: a. negative, high tax, low consumption . b. negative, high interest rate , low consumption. c. Positive, high confidence, high consumption. d. negative, high price, low consumption. The saving function= Income - Consumption . You do the math. High consumption, low saving 6. According to the life-cycle hypothesis, what is the typical pattern of saving for an individual over his or her lifetime? What impact does this behavior have on an individual’s lifetime consumption pattern? What impact does the behavior have on the saving rate in
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This note was uploaded on 12/04/2011 for the course ECONOMICS 201 taught by Professor Rcollier during the Spring '10 term at Portland CC.

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Assignment 5 - 1. (MPC and MPS) If consumption increases by...

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