Macroeconomics: Consumption, Savings, and Multiplier Calculations

What is the formula for Marginal Propensity to Consume (MPC)?

MPC = Consumption ÷ Disposable Income

What is the calculated Marginal Propensity to Consume (MPC) given a consumption of $20,500 and disposable income of $25,000?

MPC = 0.82

What is the formula for Marginal Propensity to Save (MPS)?

MPS = Savings ÷ Disposable Income

What is the calculated Marginal Propensity to Save (MPS) given savings of $4,500 and disposable income of $25,000?

MPS = 0.18

What is the slope of the consumption function?

The slope is equal to the Marginal Propensity to Consume (MPC), which is 0.82.

How does an increase in the Marginal Propensity to Consume (MPC) from 0.80 to 0.95 affect the expenditure multiplier?

The expenditure multiplier increases from 5 to 20.

What is the formula for the expenditure multiplier?

Multiplier = 1 / (1 - MPC)

At what level does macroeconomic equilibrium occur in the aggregate expenditure model?

Equilibrium occurs at $20 trillion.

What happens to the aggregate demand curve when there is a decrease in the price level?

There is a movement along the AD Curve.

How does a decrease in government purchases affect the aggregate demand curve?

It decreases G, leading to a leftward shift in AD.

What effect do lower state personal income taxes have on aggregate demand?

They increase consumption (C), resulting in a rightward shift in AD.

What is the effect of lower interest rates on aggregate demand?

They increase investment (I), causing a rightward shift in AD.

How does a lower exchange rate between the dollar and foreign currencies affect aggregate demand?

It increases exports (X) and decreases imports (M), resulting in a rightward shift in AD.

What is the formula to calculate the multiplier based on the reserve ratio?

Multiplier = 1 / Reserve Ratio

If the reserve ratio is 8%, what is the multiplier?

Multiplier = 12.5

If you deposit $1,000, what would the increase to the total money supply be based on a multiplier of 12.5?

The increase would be $11,500.

What reserve ratio corresponds to a multiplier of 4.5?

Reserve Ratio = 1 ÷ 4.5 = 22.22%