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Exam 10: Part A: Basic Macroeconomic Relationships

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Question 1

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Differentiate between the average propensity to consume and the marginal propensity to consume.

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The average propensity to consume is def...

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Question 2

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Complete the accompanying table. (a) What is the break-even level of income? How is it possible for households to dissave at very low income levels? (b) If the proportion of total income consumed decreases and the proportion saved increases as income rises, explain how the MPC and MPS can be constant at various levels of income.

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a) The break-even level of income is 125 where saving equals zero.Households dissave by borrowing or by dipping into accumulated savings. (b) The MPC and MPS represent the slopes of the consumption and savings schedules, respectively.The fact that MPC and MPS are constant means that the schedules will be straight-line graphs.However, the slope can be constant and still not be a constant proportion of income as represented on the horizontal axis.In fact, the only time the MPC and the APC would be the same would be along the 45-degree line where the slope is equal to 1 and the ratio of spending to income is equal to 1 at all levels.

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What are the relationships between the multiplier and the marginal propensities to consume and save?

List four factors that could shift the current consumption schedule.

Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all saving is personal saving.

What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions?

Suppose a family's annual disposable income is $8,000 of which it saves $2,000.(a) What is their APC? (b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS and MPC? (c) Did the family's APC rise or fall with their increase in income?

Use the graphs below to answer the following questions: (a) What types of schedules do graphs A and B represent? (b) If in graph A line A2 shifts to A3 because households consume more and this change is not due to changing taxes, then what would happen to line B2 in graph B? (c) If in graph B, line B2 shifts to B1 because households save less, then what will happen to line A2 in graph A? (d) In graph A, what has caused the movement from point A to point B on line A2? (e) If there is a lump-sum tax increase causing line A2 to shift to A1, then in graph B, what will happen to B2?

Suppose that the linear equation for consumption in a hypothetical economy is C = 50 + 0.9 Y.Also suppose that income (Y) is $400.Determine the following: (a) MPC; (b) MPS; (c) level of consumption; (d) APC; (e) APS.

Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.

Define the consumption and saving schedules.

Define the multiplier.How is it related to real GDP and the initial change in spending? How can the multiplier have a negative effect?

Complete the accompanying table. Using the below graphs, show the consumption and saving schedules graphically. (b) Locate the break-even level of income.How is it possible for households to dissave at very low income levels? (c) If the proportion of total income consumed decreases and the proportion saved increases as income rises, explain both verbally and graphically how the MPC and MPS can be constant at various levels of income.

Describe the relationship shown by the investment demand curve.

Describe the relationship between the Great Recession of 2008-2009 and the Paradox of Thrift.

Explain how consumption and saving are related to disposable income.

Most economists regard investment demand as being less stable than the income-consumption relationship.Looking at the determinants of the two relationships, support this contention.

State four factors that explain why investment spending tends to be unstable.

Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?

What is the effect of increase in wealth on the consumption and saving schedules?