Ch. 10 Review

What are the variables (the items measured on the axes) in a graph of the consumption schedule?

The variable on the vertical axis (y-axis) is consumption and the variable on the horizontal axis (x-axis) is disposable income

What are the variables (the items measured on the axes) in a graph of the saving schedule?

The variable on the vertical axis (y-axis) is saving and the variable on the horizontal axis (x-axis) is disposable income

Are the variables of the consumption and saving schedules inversely (negatively) related or are they directly (positively) related?

The variables are directly (positively) related because they move in the same direction

What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

A decade ago, the real GDP and income were higher

In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam’s MPC out of his $500 raise?

0.80

If the MPS rises, then the MPC will:

fall

In what direction will the consumption and saving schedules shift, other things equal, in the following scenario?: A large decrease in real estate values, including private homes

The consumption schedule will shift downward and the saving schedule will shift upward given the decrease in wealth

In what direction will the consumption and saving schedules shift, other things equal, in the following scenario?: A sharp, sustained increase in stock prices

The consumption schedule will shift upward and the saving schedule will shift downward given the increase in wealth

In what direction will the consumption and saving schedules shift, other things equal, in the following scenario?: A 5-year increase in the minimum age for collecting Social Security benefits

The consumption schedule will likely shift upward and the saving schedule will likely shift downward given that individuals will need to work 5 more years before retiring. There is less need to save for retirement.

In what direction will the consumption and saving schedules shift, other things equal, in the following scenario?: An economy-wide expectation that a recession is over and that a robust expansion will occur

The consumption schedule will shift upward and the saving schedule will shift downward because individuals expect to be earning higher income in the future

In what direction will the consumption and saving schedules shift, other things equal, in the following scenario?: A substantial increase in household borrowing to finance auto purchases

The consumption schedule will shift upward and the saving schedule will shift downward as individuals borrow (decrease saving) and purchase the automobiles (increase consumption)

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

Yes

What two scenarios will shift the investment demand curve right?

the expected return on capital increases and firms planning on increasing their inventories

True or False: Real GDP is more volatile (variable) than gross investment

False

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

True or False. Larger MPCs imply larger multipliers.

True