Chapter 11 Test3 - chapter 11 > 1 of 45 WHAT YOU WILL LEARN...

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1 of 45 chapter: 11 >> Income and Expenditure
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2 of 45 WHAT YOU WILL LEARN IN THIS CHAPTER The nature of the multiplier , which shows how initial changes in spending lead to further changes. The meaning of the aggregate consumption function , which shows how disposable income affects consumer spending How expected future income and aggregate wealth affect consumer spending The determinants of investment spending, and the distinction between planned investment and unplanned inventory investment
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3 of 45 WHAT YOU WILL LEARN IN THIS CHAPTER How the inventory adjustment process moves the economy to a new equilibrium after a change in demand Why investment spending is considered a leading indicator of the future state of the economy
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4 of 45 The Multiplier: An Informal Introduction The marginal propensity to consume, or MPC, is the increase in consumer spending when disposable income rises by $1. The marginal propensity to save, or MPS, is the increase in household savings when disposable income rises by $1.
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5 of 45 The Multiplier: An Informal Introduction Increase in investment spending = $100 billion + Second-round increase in consumer spending = MPC × $100 billion + Third-round increase in consumer spending = MPC 2 × $100 billion + Fourth-round increase in consumer spending = MPC 3 × $100 billion • • • • • • • • • • • • Total increase in real GDP = (1 + MPC + MPC2 + MPC3 + . . .) × $100 billion
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6 of 45 The Multiplier: An Informal Introduction So the $100 billion increase in investment spending sets off a chain reaction in the economy. The net result of this chain reaction is that a $100 billion increase in investment spending leads to a change in real GDP that is a multiple of the size of that initial change in spending. How large is this multiple?
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7 of 45 The Multiplier: Numerical Example Rounds of Increases of Real GDP When MPC = 0.6
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8 of 45 The Multiplier: Numerical Example In the end, real GDP rises by $250 billion as a consequence of the initial $100 billion rise in investment spending: 1/(1 − 0.6) × $100 billion = 2.5 × $100 billion = $250 billion
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9 of 45 1) A decline in investment spending caused by a change in business expectations has no effect on consumer spending. 1. True 2. False
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10 of 45 2a) What is the multiplier if the marginal propensity to consume is 0.5? 1. 0.5 2. 1 3. 2 4. 5
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11 of 45 2b) What is the multiplier if the marginal propensity to consume is 0.8? 1. 0.5 2. 1 3. 2 4. 5
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12 of 45 3) As a percentage of GDP, savings accounts for a larger share of the economy in the country of Scania compared to the country of Amerigo. Which country is likely to have the larger multiplier? 1. Scania 2. Amerigo
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13 of 45 The Multiplier: An Informal Introduction An autonomous change in aggregate spending is an initial change in the desired level of spending by firms, households, or government at a given level of real GDP.
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