Chapter 8 Review
Macroeconomic Measurement
&
Basic Concepts
With an MPS of .5, the MPC will be:
• 1.0 minus .5
The most important determinant of
consumption and saving is:
• level of income.
As disposable income goes up the
• APC falls
Which fiscal policy actions would be
most effective in combating a
recession
• Taxes decrease
• Government Spending increase
The consumption schedule relates:
• consumption to the level of disposable income
• The consumption schedule in the above
diagram indicates that:
up to a point consumption exceeds income,
but then falls below income.
APC + APS =
• 1
The sector of the economy that is
responsible for Consumption is:
• the Household sector
The relationship between
consumption and disposable income is
such that:
• a direct and relatively stable relationship
exists between consumption and income.
If the Government increases
Government Purchases by $800 billion
dollars and increases taxes by $800
billion dollars the effect on GDP will be
• positive.
If the marginal propensity to consume
is three quarters, then an increase in
personal income taxes of $100 will
most likely result in
• a decrease in consumption of $75 and a
decrease in savings of $25.
The spending multiplier will have an
effect on any new, additional spending
in the component(s) of
• Investment and Government Purchases
• MPC is greater in A than in B.
If X’s MPC is .0, this means that X will:
• spend seven-tenths of any increase in its
disposable income.
Dissaving occurs where:
• consumption exceeds income.
The saving schedule is drawn on the
assumption that as income increases:
• saving will increase absolutely and as a
percentage of income.
If the marginal propensity to consume
is .9, then the marginal propensity to
save must be:
• .1
The greater is the marginal propensity
to consume, :
• The smaller is the marginal propensity to save.
In the late 1990s the U.S. stock market
boomed, causing U.S. consumption to
rise.
• wealth effect.
The wealth effect is shown graphically
as a:
• rightward shift of the consumption schedule.
MPS/MPC
Marginal
propensity to
save (MPS)
Marginal
propensity to
consume (MPC)
=
=
change in saving
change in income
change in consumption
change in income
The investment demand slopes
downward and to the right because
lower real interest rates:
• enable more investment projects to be
undertaken profitably.
An increase in the real rate of interest
will
• reduce the level of investment.
The investment demand curve
suggests:
• there is an inverse relationship between the
real rate of interest and the level of
investment spending.
A decrease in corporate income taxes
will:
• shift the investment-demand curve to the
right.
Investment spending in the United
States tends to be unstable because:
• profits are highly variable.
• Capital goods, because their purchases can be
postponed like durable consumer goods, tend
to contribute to instability in investment
spending.
The multiplier is:
• 1/MPS
Or
• 1/(1 MPC)
• Which economy has the highest marginal
propensity to consume?
• 4
• Which economy has the largest multiplier?
• 4
The practical significance of the
multiplier is that it:
• magnifies initial changes in spending into
larger changes in GDP.
If the MPC is 0.75 and gross
investment increases by $8 billion,
GDP will increase by
• $32 billion.