ECON 1BB3 Chapter Notes - Chapter 9: Aggregate Demand, Disposable And Discretionary Income, Consumption Function

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oliveotter718

29 Oct 2016

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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Chapter 9 aggregate expenditure and aggregate demand. Change of consumption divided by change in income: net wealth value of all assets minus liabilities or debts (mortgage, car loans, student loans) Higher interest rates, less disposable income, more saving, less consumption: expectations also cause changes in curve. Expecting job, spend more, shift along disposable income curve. Change in expectations about price levels/interest rates affects consumption: life-cycle model of consumption and saving. At different points in life, consumption and saving varies, but the net savings over a lifetime is usually almost nothing. Investment, government spending, and net exports: investment and market interest rate have a negative relationship. If interest rate is high, there is less investment, costs more to borrow. If interest rate is lower, there is more investment, costs less to borrow: investment depends more on interest rates than current income level, since it often takes time for return.

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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. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

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

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

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

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

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ECON 1BB3 Chapter Notes - Chapter 9: Aggregate Demand, Disposable And Discretionary Income, Consumption Function

ECON 1BB3 Full Course Notes

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