EC140 Chapter Notes - Chapter 27: Consumption Function, Real Interest Rate, Chapter 27

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An increase in real gdp increases aggregate expenditure. An increase in aggregate expenditure increases real gdp. Consumpion funcion- relaionship between consumpion expenditure and disposable income, other things remaining the same. Saving funcion- relaionship between saving and disposable income, other things remaining the same. Marginal propensity to consume (mpc)- fracion of a change in disposable income that is spent on consumpion. Mpc = change in consumpion expenditure / the change in disposable income. I. e. if disposable income increases by 100 million and consumpion expenditure increases by 75 million, mpc is 0. 75. Marginal propensity to save (mps)- fracion of a change in disposable income that is saved. Mps = change in saving / change in disposable income. I. e. when disposable income increases by 100 million, saving increases by 25 million. Mpc + mps = change in disposable income. An increase in canadian real gdp increases the quanity of canadian imports.

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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.

A $100 million increase in investment spending will cause read GDP to

Select one:

a. decrease by less than $100 million

b. increase by more than $100 million

c. increase by less than $100 million

d. decrease by $100 million

e. increase by $100 million

the marginal propensity to consume is 0.5, then a $100 million increase in investment spending will lead to an increase of real GDP by

Select one:

a. $100 million

b. $50 million

c. $150 million

d. $200 million

e. $300 million

When income is $1,000, the level of consumption spending is equal to $850. When income rises to $1,200 the level of consumption spending is equal to $1,000. In this case the value of the marginal propensity to consume is

Select one:

a. 0.80

b. 0.50

c. 0.75

d. 0.85

e. 0.83

The marginal propensity to consume measures the

Select one:

a. increase in consumer spending when investment spending rises by $1

b. increase in disposable income when consumer spending rises by $1

c. increase in consumer spending when disposable income rises by $1

d. increase in disposable income when investment spending rises by $1

e. increase in consumer spending when taxes rise by $1

In the Keynesian model

aggregate demand determines real GDP per year.

the short-run aggregate supply curve determines real GDP.

unemployment cannot persist for long periods of time.

the aggregate demand curve determines the price level.

A terrible winter storm causes enormous problems in the

northeastern

part of the United States. This would cause

the short-run aggregate supply curve to shift to the left, but would have no effect on the long-run aggregate supply curve.

both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.

the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right.

both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts.

Equilibrium real GDP rises after the dollar strengthened. From this we can conclude that

the increase in aggregate demand was greater than the decrease in aggregate supply.

the decrease in aggregate demand was more than the increase in aggregate supply.

the decrease in aggregate demand was less than the increase in aggregate supply.

the increase in aggregate demand was less than the decrease in aggregate supply.

Saving is

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

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 serviceswhile savings is the difference between real GDP and disposable income.

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.

A permanent reduction in investment spending leads to

a proportional decrease in real GDP.

a more than proportional decrease in real GDP.

a more than proportional increase in real GDP.

a less than proportional decrease in real GDP.

An increase in net exports leads to an increase in real GDP. Further,

consumption spending increases while investment spending decreases.

consumption spending increases but saving does not change.

consumption spending and saving increase.

government spending decreases to offset the increase in net exports.

An increase in aggregate spending that is caused by a factor other than the price level will lead to the

aggregate demand curve shifting to the right.

aggregate supply curve shifting to the right.

aggregate supply curve shifting to the left.

aggregate demand curve shifting to the left.

The marginal propensity to consume is 0.9. The multiplier is

0.9.

1.11.

0.1.

10.

When the SRAS curve slopes upward, the actual affect of an increase in real autonomous spending on equilibrium real GDP is smaller than predicted by the multiplier because

real GDP increases.

the price level rises

the price level falls.

real GDP decreases.

Other things equal, the lower the total real value of final goods and services demanded in the economy the

more the production possibilities cure shifts to the left.

lower the price level.

higher the price level.

lower the level of endowments.

The long-run aggregate supply curve can be thought of as the

level of output for which real GDP equals nominal GDP.

level of output that the nation is currently producing.

level of real GDP associated with a constant price level.

full-employment level of real GDP.

EC140 Chapter Notes - Chapter 27: Consumption Function, Real Interest Rate, Chapter 27

EC140 Full Course Notes

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