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Economics 1022A/B Lecture Notes - Lecture 8: Consumption Function, Chapter 27, Aggregate Demand

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mauveporpoise978
23 Mar 2017
School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Jeannie Gillmore

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ECON 1022A/B Full Course Notes
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ECON 1022A/B Full Course Notes
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Document Summary

The most direct influence is disposable income, which is real gdp or aggregate income minus net taxes (taxes minus transfer payments). Planned consumption expenditure plus planned saving equals disposable income. The greater the disposable income, the greater is consumption expenditure and the greater is saving. The relationship between consumption expenditure and disposable income, other things remaining the same, is called the consumption function. The relationship between saving and disposable income, other things remaining the same, is called the saving function. The extent to which a change in disposable income changes consumption expenditure depends on the marginal propensity to consume. The marginal propensity to consume (mpc) is the fraction of a change in disposable income that is consumed. The (cid:373)argi(cid:374)al prope(cid:374)sit(cid:455) to (cid:272)o(cid:374)su(cid:373)e is (cid:272)al(cid:272)ulated as the (cid:272)ha(cid:374)ge i(cid:374) (cid:272)o(cid:374)su(cid:373)ptio(cid:374) e(cid:454)pe(cid:374)diture c, di(cid:448)ided (cid:271)(cid:455) the (cid:272)ha(cid:374)ge i(cid:374) disposa(cid:271)le i(cid:374)(cid:272)o(cid:373)e, yd. The extent to which a change in disposable income changes saving depends on the marginal propensity to save.

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Related Questions

Question 1

Which of the following describes the relationship between the change in inventories and aggregate expenditure?

A.

Aggregate expenditure equals the change in inventories minus GDP.
B.

The change in inventories equals GDP divided by aggregate expenditures.
C.

Aggregate expenditures equals GDP divided by the change in inventories.
D.

Aggregate expenditures equals GDP minus the change in inventories.
E.

The change in inventories equals GDP multiplied by aggregate expenditure.

1 points

Question 2

Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?

A.

Disposable income and consumption fall by $10 billion
B.

Disposable income and consumption rise by $10 billion
C.

Disposable income rises by $10 billion and consumption rises by $8 billion
D.

Disposable income falls by $10 billion and consumption falls by $8 billion
E.

Disposable income rises by $10 billion and consumption falls by $8 billion

1 points

Question 3

If aggregate expenditure at a particular level of income is less than output,

A.

output will increase
B.

output will decrease
C.

output will remain the same
D.

output will rise slightly and then level off
E.

we cannot determine what will happen to output

1 points

Question 4

The consumption function

A.

illustrates the relationship between real disposable income and real consumption spending
B.

illustrates the relationship between the price level and real consumption spending
C.

is the relationship between productivity and real consumption spending
D.

shows how real consumption increases when real disposable income decreases
E.

illustrates the relationship between real consumption spending and employment

1 points

Question 5

The focus of the short-run macro model is on the role of

A.

spending in explaining economic fluctuations
B.

labor in explaining economic fluctuations
C.

financial markets in explaining economic fluctuations
D.

output in explaining economic fluctuations
E.

resources in explaining economic fluctuations.

1 points

Question 6

If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?

A.

Aggregate expenditure is greater than output, so inventories will increase and output will be raised.
B.

Aggregate expenditure is greater than output, so inventories will decrease and output will be increased.
C.

Aggregate expenditure is less than output, so inventories will decrease and output will be raised.
D.

Aggregate expenditure is less than output, so inventories will increase and output will be lowered.
E.

Aggregate expenditure is greater than output, so inventories will increase and output will be lowered.

1 points

Question 7

If the marginal propensity to consume is 0.7, the expenditure multiplier is

A.

7.0
B.

0.7
C.

3.0
D.

3.3
E.

not determinable without additional information.

1 points

Question 8

Aggregate expenditure is the sum of

A.

all types of spending by households and firms
B.

spending and savings by households
C.

spending by households and governments on final goods and services
D.

spending by households, government, firms, and foreigners on final goods and services
E.

all spending and saving by households, firms, and governments

1 points

Question 9

If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?

A.

$10,000
B.

$500
C.

$50
D.

$5,000
E.

$9,524

1 points

Question 10

When real consumption expenditure is plotted against real disposable income the resulting relationship is

A.

very weak.
B.

virtually flat .
C.

positive and very close to linear.
D.

negative and very close to linear.

The average propensity to consume (APC) equals

the change in real disposable income divided by the change in consumption expenditures.

the change in consumption expenditures divided by the change in real disposable income.

real disposable income divided by consumption expenditures.

consumption expenditures divided by real disposable income.

The consumption function shows how much

households plan to consume per year at each level of real disposable income.

households plan to consume per year at each level of savings.

households plan to consume per year at each possible interest rate.

real disposable income people will earn at each income tax bracket.

Saving is

the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.

the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.

the difference between disposable income and spending on goods and services while savings is the difference between real GDP and disposable income.

the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.

Thinking as an economist would, which is true of investment?

Investment represents spending on capital goods.

Investment is a stock concept.

Investment is putting money into stocks and bonds.

It is the portion of disposable income that is not used for consumption or saving.

An appreciation of the U.S. dollar ________ the price of U.S. imports, and ________ the price of U.S. exports.

lowers, lowers

increases, increases

increases, lowers

lowers, increases

QUESTION 33

Other things being equal, if input prices rise in a country, then there would be

cost-push inflation.

demand-pull inflation.

cost-push deflation.

more production and a lower price level.

Why is there a "two-way" link between consumption and GDP? ❢ How does an increase in disposable income affect the consumption function? An increase in expected future income? ❢ If the consumption function shifts upward, what happens to the saving function? Why? ❢ When is actual aggregate expenditure different from planned aggregate expenditure? Why happens to being the two back to equality? ❢ Explain why income taxes reduce the size of the expenditure multiplier. ❢ When the equilibrium real GDP is below potential GDP, how does the unemployment rate compare with the natural rate? What is the results of this state of affairs that restores the long-run equilibrium? ❢ What is a recessionary gap? How does the economy adjust to eliminate a recessionary gap?