ECON103 Lecture Notes - Lecture 4: Real Interest Rate, Disposable And Discretionary Income, Household Debt

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crimsonwasp380

30 Aug 2016

School

University of Delaware

Department

Economics

Course

ECON103

Professor

Williams Kamilah

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Document Summary

In order to understand gdp, we need to understand what drives consumption and investment. Income, consumption and saving: consumption (c) and saving (s) are primarily determined by disposable income (di) (after-tax income) There are two things you can do with your disposable income: you can consume it or save it (see graph) us economy: relationship between disposable income (x axis) and consumption (y axis). It"s an upward slope so consumption has been increasing. All point on line mean c = di. C>di (consumption is generally less than disposable income) Income, consumption and saving: on the 45 degree line. C = di (break-even income: the vertical distance between 45 degree line and the consumption line labeled c represents the amount of saving (s) in that year. U. s. facts: consumption is directly (positively) related to disposable income, households spend most of their income. There is a minimal level of consumption that you need to survive.

Related Questions

Specific assignment: Mark each statement either True or False. If a statement is false, explain (very briefly) why it is false.

Keynes hypothesized that consumption is positively related to income. True

The marginal propensity to consume, MPC, is measured as changes in consumption over changes in income. True

The MPC is merely the percent of oneâs income that is spent to purchase goods and services. True

The MPC is the slope of the consumption function.

If the MPC is .8, then it may be concluded that the MPS must be .2.

If a personâs income is $10,000 and that person is spending $7,500 on consumption, then it may be concluded that that person has a marginal propensity to save of .25.

The MPC and the MPS must sum to one, meaning that 1 â MPC = MPS

Given a linear (straight-line) consumption function, the MPC must be a constant.

At the point graphically at which the consumption function intersects the 45-degree reference line, the MPC must be equal to 1.

If the consumption function lies above the 45-degree reference line, then there must be negative saving in the economy.

Autonomous consumption is that level of consumption spending that is independent of the level of income.

A change in the level of income will shift the consumption function either upward or downward.

A change in the level of consumer wealth will shift the consumption function either upward or downward.

If the MPC has a positive value, then the MPS must have a negative value.

Saving is defined simply as disposable income minus consumption.

If the consumption function has a slope of 4/5, then the saving function must have a slope of .2.

Any factor that would shift the consumption function upward would shift the saving function upward also.

The average propensity to consume (APC), like the MPC, is simply the slope of the basic, Keynesian consumption function.

Given a typical shaped consumption function, as the level of income rises, the APC rises as well.

If a consumption function graphically starts at a point above the origin (i.e., has a positive vertical axis intercept), then the saving function must begin below the origin.

A dramatic rise in household inflationary expectations could be expected to shift the consumption function downward and the saving function upward.

1. Menu costs are:

A) the costs of materials.

B) the cost of changing prices.

C) particularly low when inflation is high.

D) a reason that the inflation rate typically underestimates true price level changes.

2. A market basket costs $150 to buy in the base year and $60 to buy in year X.

A. the price index for year X is 250.

B. Year X probably occurred after the base year.

C. Year X is the base year.

D. the price index for year X is .4 or 40%.

3. A traditional expansionary gap is created when the aggregate demand curve moves to the:

A. right of the natural rate of output; inflation rises and unemployment falls.

B. left of the natural rate of output; inflation falls and unemployment rises.

C. right of the natural rate of output; inflation falls and unemployment rises.

D. left of the natural rate of output; inflation rises and unemployment falls.

4. Consumers change their purchases and move ALONG the same consumption function when:

A) Their income changes

B) Their tastes change

C) The price level changes

D) All of the above.

5. If MPC is .75 then if consumer income rises by $10,000 we would predict that consumption will:

A. rise by $7500 while savings fall by $2500.

B. fall by $2500 while savings rise by $7500.

C. rise by $7500 while savings rise by $2500.

D. fall by $2500 while savings fall by $7500.

6. Autonomous consumption is

A. that part of consumption that rises or falls with changes in disposable income.
B. the minimum that people will spend even if disposable income is zero.
C. the amount people will spend when the C line crosses the 45-degree line.
D. the amount people will spend when income is equal to consumption.

7. A low rate of investment could be explained by a

A. low rate of saving and low-interest rates.
B. low rate of saving and high-interest rates.
C. high rate of saving and low-interest rates.
D. high rate of saving and high-interest rates.

8. Mr. A makes $40,000 a year; Ms. B makes $20,000 a year. Mr. A pays $6,000 in taxes while Ms. B pays $4,000 in taxes. Which of the following is true?

A. Taxes are progressive because Mr. A pays a higher dollar amount in taxes than Ms. B

B. Taxes are neutral because Mr. A makes more money before and after taxes than Ms. B.

C. Taxes are regressive because Mr. A pays a lower tax rate than Ms. B.

D. Taxes are progressive because Ms. B pays a lower dollar amount in tax.

9. The 45 degree line in the full AE model represents

A. all points where C = Y.

B. all points where AE = Y

C. all points where C + I = G + Xn

D. all points where C = I + G + Xn

10. International trade:

A. Allows countries to specialize in the goods at which they are best at producing.

B. can increase the goods and services both trading partners have.

C. can be unbalanced where one partner exports more to the other than the other way around.

D. all of the above.

11. If AD rises in the short run:

A. it pushes up the price level.

B. it decreases national output.

C. increases full employment.

D. all of the above.

12. We cut down trees and sell the timber for $8000. The timber is sawn up into lumber that sells for $18,000. The lumber is used to build furniture that sells to consumers for $30,000.

A. $30,000 goes into GDP.

B. $4000 goes into GDP.

C. $56,000 goes into GDP.

D. $22,000 goes into GDP.

13. The long-run annual growth rate of the U.S. economy tends to be about:

A. 1% or less.

B. 2%

C. 5%

D. 10% or more.