Econ chp 9 – Flashcards
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the most important determinant of consumer spending is
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the level of income
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the most important determinant of consumption and saving is the
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level of income
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1200 to 1700; -100 to +100
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consume is 3/5s
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with an MPS of .4, the MPC will be
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1.0 minus
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the MPC can be defined as that fraction of a
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change in income that is spent
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the 45 degree line on graph relating consumption and income shows
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all the points at which consumption and income are equal
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as disposable income goes up the
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APC falls
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the consumption schedule shows
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the amounts households plan or intend to consume at various possible levels of aggregate income; consumption and income
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the consumption schedule relates
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consumption to the level of disposable income
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a decline in disposable income
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decreases consumption by moving downward along a specific consumption schedule
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the APC is calculated as
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consumption/income
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the consumption schedule in above indicates that
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up to a point consumption exceeds income, then falls below
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the consumption schedule is drawn on assumption that as income increases consumption will
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increase absolutely, but decline as a percentage of income
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APC is
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greater than 100%
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consumption and saving schedules reveal that the
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MPC is greater than 0 but less than one
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as disposable income increases, consumption
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and saving both increase
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the APC indicates
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% of total income that will be consumed
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relationship between consumption and disposable income
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a direct and relatively stable relationship exists
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MPC is .8 and DI is 200
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consumption and saving not determined
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MPC for economy
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the slope of consumption schedule or line
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c=20 + .9Y.. MPC?
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.90
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c=20 + .9Y.. 800 DI
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60
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cause movement down along econs consumption schedule
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decrease in disposable income
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A & B graph
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MPC is greater in A than in B
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A&B graph - where is consumption schedule intersects 45
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APC is 1
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10000 and .75
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14500
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MPC is .8
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spend 8/10s of any increase
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suppose a familys consumption exceeds DI;
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APC is greater than 1
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one can determine the amount of any level of totalt income that is consumed by
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multiplying total income by APC
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consumption and saving schedules reveal
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saving varies directly with level of DI
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dissaving means
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that households are spending more than their current incomes
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the saving schedule is drawn on assumption that incomes increases
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saving will increase absolutely and as a % of income
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at the point where consumption schedule intersects 45 line
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saving is 0
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saving schedule is such that as aggregate income increases by certain amount saving
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increases, but by a small amount
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if the consumption schedule is linear
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saving schedule will also be linear
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given the consumption schedule it is possible to graph the relevant saving schedule by
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plotting vertical differences between consumption schedule and 45 line
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aggregate income decreases, APC
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will increase, but APS will decrease
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if saving schedule is straight line
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MPS must be constant
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cause a movement up along an econs saving schedule?
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increase in disposable income
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US stock market boomed, causing US consumption to rise;
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wealth effect
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the wealth effect is shown graphically as a
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shirt of the consumption schedule
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a movement from b to a along C1 might be caused by a
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recession
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a shift of the consumption schedule from C1 to c2 might be caused by a
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wealth effect of an increase in stock market prices
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a movement from a to b along C1 might be caused by a
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increase in real GDP
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a shift of the consumption schedule from c2 to c1 might be caused by a
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reverse wealth effect caused by a decrease in stock market prices
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upward shirt of saving schedule
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APC has decreased and APS has increased
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NOT tend to shift consumption schedule upward
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expectation of a future decline in consumer price index
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if consumption schedule shifts upward and shift was not caused by tax change, saving schedule
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will shift down
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not cause consumption schedule to shift
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a change in consumer income
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increase in personal taxes will shift
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both consumption and saving schedules downward
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some reason households become increasingly thrifty, show this by
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upshift of saving schudule
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s1 to s2
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MPS increased
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if consumption schedule shifts upward this means that
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APC is now higher at each level of DI
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assume econ consumption and saving schedule simultaneously shift down;
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increases in personal taxes
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C1 to C2
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MPC and APC at each income level have both increased
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DI - 200 C - 205 WHAT IS MPC
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.8
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at the 200 level of DI
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dissaving is $5
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if DI was 325 we would expect consumption to be
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305
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DI - 0 saving - -10 MPC?
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.8
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100 level of income; APS?
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.1
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plotted on graph, slope of saving schedule
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.2
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As disposable income increases, ____ and ______ both increase
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consumption and savings
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graph; the MPS is equal to
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CD/BD
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graph; at disposable income level D, the APS equal
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CD/D
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graph; at disposable income level D, consumption is
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equal D minus CD
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graph; consumption equals disposable income when
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disposable income is B
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graph; the break even level of DI
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100
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investment demand curve portrays an inverse (negative) relationship between
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the RIR and investment
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the investment demand slopes downward and to the right because lower RIR
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enable more investment projects to be undertaken profitably
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other things equal, a decrease in the RIR wil
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move the economy downward along its existing investment demand curve
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80000 and 96000; %
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20%
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2000 and 2300
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15%
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if the firm borrow funds at interest rate of 10%
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purchase the machine because expected rate of return exceeds the interest rate
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the relationship between the RIR and investment is shown by the
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investment demand schedule
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given the expected rate of return on all possible investment opportunities in econ
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an increase in RIR will reduce the level of investment
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a decline in RIR will
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increase the amount of investment spending
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immediate determinants of investment spending are the
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expected rate of return on capital goods and the real interest rate
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the investment demand curve suggests
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there is an inverse relationship between the RIR and investment
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if business taxes are reduced and RIR increases
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the level of investment might either increase or decrease
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other things equal, 10% decrease in corporate income taxes
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shift the investment demand curve to right
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other things equal, the RIR and investment are
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inversely related
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the investment demand curve will shift to the right as result of
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businesses becoming more optimistic about future business conditions
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other things equal, if the RIR falls and business taxes rise
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we will be uncertain as to the resulting change in investment
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a rightward shift of investment demand curve might be caused by
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an increase in the expected rate of return on investment
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the RIR is
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the percentage increase in purchasing power that the lender receives on a loan
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when we draw an investment demand curve we hold constant all of the following except
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the interest rate
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high rate of inflation is likely to cause a
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high nominal interest rate
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if the RIR in econ is i and expected rate of return on additional investment other things equal
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investment will take place until i and r are equal
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shift investment demand curve from ID1 to ID2
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higher expected rates of return
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shift investment demand curve from ID1 to ID3
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lower expected rates of return on investment
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increase investment, while leaving an existing investment demand curve ID2 in place
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a lower interest rate
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investment spending in US is
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more variable than real GDP