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MODULE: MACROECONOMICS BB106 Unit 3: Consumption and Investment TUTORIAL 3
Short-answer Problems
Question 1: Differentiate between the average propensity to consume (APC ) and the marginal propensity to consume(MPC). APC is the relationship of the amount consumed to the level of income; it is (consumption)/(income). MPC is a measure relating the change in consumption resulting from a change in income to that change in income; it is (change in consumption)/(change in income).
Question 2: What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions? MPC is the ratio of a change in consumption to the change in income which caused that change in consumption. MPS is the ratio of the change in saving to the change in income which caused that change in saving sum of the MPC and MPS for any change in disposable income must always equal 1 because any fraction of a change in income which is not consumed is saved.
Question 3: Which is the most volatile component of total spending? What four factors contribute to the volatility of this component of total spending? most volatile component of aggregate spending is investment investment generates most of the fluctuation in employment and output that takes place over the course of a business cycle. four factors that contribute to its volatility : (a) durability of capital goods (b) irregularity of technological progress that generates innovation (c) variability in profits (d) expectations
Question 4: Calculate the multiplier when the MPC is .5, .75, .90. What is the relationship between MPC and the multiplier? When MPC = .5, the multiplier is 2 When MPC = .75, the multiplier is 4. When MPC = .90, the multiplier is 10 The relationship between MPC and the multiplier is direct As the MPC increases, so does the multiplier [multiplier = 1/1-MPC].
Question 5: Calculate the multiplier when the MPS is .5, .25, .10. What is the relationship between MPS and the multiplier? When MPS = .5, the multiplier is 2 When MPS = .25, the multiplier is 4. When MPS = .10, the multiplier is 10 The relationship between MPS and the multiplier is inverse. As the MPS decreases, so the multiplier increases [multiplier = 1/MPS ]
Question 6:
Complete the accompanying table.
Level of output and income (GDP = DI) $480 520 560 600 640 680 720 760 800
Consum ption
Saving
APC
APS
MPC
MPS
$_____ _____ _____ _____ _____ _____ _____ _____ _____
$8 0 8 16 24 32 40 48 56
_____ _____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____ _____
(a) Using the below graphs, show the consumption and saving schedules graphically. (b) Locate the break-even level of income. How is it possible for households to dissave at very low income levels?
(a) See graphs (b) The break-even level of income is 520 where saving equals zero. Households dissave by borrowing or by dipping into accumulated savings
Question 7: Suppose a familys annual disposable income is $8000 of which it saves $2000. (a) What is their APC? (b) If income rises to $10,000 and they plan to save $2800, what are MPS and MPC? (a) APC = 0.75 (b) MPS = 0.4; MPC = 0.6
True / False Questions
1) Consumption equals disposable income plus saving. 2) If DI is $275 billion and the APC is 0.8, we can conclude that saving is $55 billion. 3) The average propensity to consume is defined as income divided by consumption. 4) 1 + MPS = MPC. 5) If marginal propensity to consume is 0.70, then it will necessarily consume seven-tenths of its total income. 6) The slope of the consumption schedule is measured by the MPC. 7) Investment is highly stable; it rarely changes. 8) The greater the MPC, the greater the multiplier.
9) If the MPS is 1, the multiplier will be 1. 10) If the MPC is .9 and investment spending increases by $20 billion, real GDP will increase by $200 billion. Multi-Choice Questions 1. John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? A. Bank panic of 1907 B. Great Depression C. Spectacular economic growth during World War II D. Economic expansion of the 1920s 2. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A. save is three-fifths. B. consume is one-half. C. consume is three-fifths. D. consume is one-sixth.
3. Refer to the figure above. The consumption schedule indicates that: A. consumers will maximize their satisfaction where the consumption schedule and 45 line intersect. B. up to a point consumption exceeds income, but then falls below income. C. the MPC falls as income increases. D. households consume as much as they earn.
4 Investment spending in the United States tends to be unstable because: A. expected profits are highly variable. B. capital goods are durable. C. innovation occurs at an irregular pace. D. all of these contribute to the instability.
5. The multiplier effect means that: A. consumption is typically several times as large as saving. B. a change in consumption can cause a larger increase in investment. C. an increase in investment can cause GDP to change by a larger amount. D. a decline in the MPC can cause GDP to rise by several times that amount. 6. The multiplier is defined as: A. 1-MPS. B. change in GDP initial change in spending. C. change in GDP/initial change in spending. D. change in GDP - initial change in spending. 7. If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will: A. increase by $10 billion. B. increase by $2.10 billion. C. decrease by $4.29 billion. D. increase by $4.29 billion.
8. The increase in income that results from an increase in investment spending would be greater the: A. smaller the MPS. B. smaller the APC. C. larger the MPS. D. smaller the MPC. 9. If the MPC is 0.8, what change in investment is required to reduce income by $60 billion? A. $12 billion B. $15 billion C. $20 billion D. $25 billion 10. In a closed, private economy, income is $50 billion and consumption is $40 billion. When income rises by 10 percent, consumption rises by 9 percent. The MPS over the relevant income range is: A. 0.11 and the multiplier is 9.09 B. 0.28 and the multiplier is 3.57 C. 0.62 and the multiplier is 1.61 D. 0.72 and the multiplier is 3.57

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MODULE: MACROECONOMICS BB106 Unit 3: Consumption and Investment TUTORIAL 3

Complete the accompanying table.

$___ _ _ _ _ _ _ _ ___

___ _ _ _ _ _ _ _ ___

___ _ _ _ _ _ _ _ ___

___ _ _ _ _ _ _ _ ___

___ _ _ _ _ _ _ _ ___

True / False Questions

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