Current Disposable Income and Consumer Spending

What led to the boom period in Ft. Myers from 2003 to 2005?

A surge in home construction driven by speculators buying houses as investments.

What was a consequence of the halt in home construction in Ft. Myers?

A rise in the unemployment rate to 14% by 2009.

How did workers in Ft. Myers contribute to the economic growth during the boom period?

By creating jobs for sales workers, waiters, and gardeners through their spending habits.

What caused the prices of houses in Ft. Myers to rise to unsustainable levels during the boom?

People who were buying houses solely for investment purposes. Signup and view all the answers

Why did Ft. Myers experience a bust period after the boom?

Due to a scarcity of jobs and closure of many stores. Signup and view all the answers

What was one successful business venture during Ft. Myers' bust period?

Foreclosure tours offered by Marc Joseph. Signup and view all the answers

What drives the business cycle, according to the text?

Ups and downs in investment spending Signup and view all the answers

Which of the following is NOT a component of aggregate demand?

Exports Signup and view all the answers

In the scenario presented in the text, what happens if home builders decide to spend an extra $100 billion on home construction?

Aggregate output increases by $100 billion Signup and view all the answers

What is the direct effect of an increase in investment spending, according to the text?

Increase in household disposable income Signup and view all the answers

What is the primary consequence of changes in investment spending on consumer spending?

Rise in disposable income for households Signup and view all the answers

How does the text describe the relationship between investment and aggregate output?

They are directly related Signup and view all the answers

Which of the following statements about the chain reaction described in the text is accurate?

It results in multiple rounds of increases in aggregate output Signup and view all the answers

What is assumed about producers' willingness to supply additional output?

They are willing to supply additional output at a fixed price Signup and view all the answers

Which of the following components is NOT considered when making simplifying assumptions?

$100 billion increase in home construction spending Signup and view all the answers

In the given scenario, what happens as a result of an increase in household disposable income?

Rise in aggregate output Signup and view all the answers

What is an autonomous change in aggregate spending?

An initial change in aggregate spending at a given level of real GDP Signup and view all the answers

What does the multiplier represent in economics?

The ratio of the change in real GDP to the change in aggregate spending Signup and view all the answers

How does the size of the multiplier change with a higher Marginal Propensity to Consume (MPC)?

The multiplier increases Signup and view all the answers

What is the relationship between disposable income and consumer spending according to the text?

Consumer spending increases with disposable income Signup and view all the answers

What determines how large each round of expansion is compared with the previous round?

Marginal Propensity to Consume (MPC) Signup and view all the answers

What happens to real GDP as a result of an initial autonomous increase in aggregate spending?

Real GDP rises initially and then continues to rise further Signup and view all the answers

How is the multiplier formula affected by the introduction of taxes and foreign trade?

The formula becomes more complex Signup and view all the answers

What does MPS stand for in economics?

Marginal Propensity to Save Signup and view all the answers

How does a boom in housing prices affect consumer spending according to the text?

Consumer spending increases as consumers feel wealthier. Signup and view all the answers

How does an increase in investment spending affect real GDP?

Real GDP increases as a chain reaction unfolds. Signup and view all the answers

What does MPC stand for in the context of consumer spending?

Marginal Propensity to Consume Signup and view all the answers

In the context of consumer spending, what does MPS represent?

Marginal Propensity to Save Signup and view all the answers

If MPC equals 0.6, what happens to real GDP after the second round of consumer spending increase following a $100 billion investment?

$60 billion increase Signup and view all the answers

What is the mathematical expression for the total effect on real GDP after multiple rounds of consumer spending following a $100 billion increase in investment spending?

$(1 + MPC + MPC^2 + MPC^3 + ...) × $100 billion$ Signup and view all the answers

What determines the amount of additional disposable income saved, affecting the subsequent rounds of consumer spending?

MPS Signup and view all the answers

Following a second-round increase in consumer spending, how does real GDP change if MPS equals 0.4?

$36 billion increase Signup and view all the answers

What is the relationship between MPC and MPS in terms of total disposable income?

MPC = 1 - MPS Signup and view all the answers

What is the outcome of the chain reaction triggered by a $100 billion increase in investment spending?

$250 billion increase in real GDP Signup and view all the answers

Why is the total rise in real GDP limited to $250 billion even with multiple rounds of expansion?

'Leakage' of saved income reduces available spending for subsequent rounds. Signup and view all the answers

How does an infinite series of 1 + x + x^2 + x^3 + ... resolve mathematically when x is between 0 and 1?

1/(1-x) Signup and view all the answers

What is an autonomous change in aggregate spending?

A change in spending independent of changes in real GDP Signup and view all the answers

How is the multiplier calculated?

ΔY/ΔAAS Signup and view all the answers

How does the size of the multiplier vary with MPC?

The multiplier is higher when MPC is high. Signup and view all the answers

What happens to disposable income 'leakage' in each round of expansion with a high MPC?

It decreases. Signup and view all the answers

What limits the total rise in real GDP despite multiple rounds of expansion?

Marginal Propensity to Save (MPS) Signup and view all the answers

How is consumer spending affected by a boom in housing prices according to the text?

Consumer spending rises initially and then decreases. Signup and view all the answers

What determines the size of each round of expansion according to the text?

(1 - MPS) fraction of disposable income spent Signup and view all the answers

When does an autonomous change in aggregate spending occur?

Before real GDP rises Signup and view all the answers

What is the limit to the rise in real GDP despite multiple rounds of expansion?

The amount saved due to disposable income leakage Signup and view all the answers

What factor influences how much 'leaks out' into savings during each round of expansion?

The marginal propensity to save (MPS) Signup and view all the answers

What is the most important factor affecting a family's consumer spending?

The household's current disposable income Signup and view all the answers

What does the Bureau of Labor Statistics (BLS) collect data on regarding family income and spending?

Before-tax income and after-tax income for each group Signup and view all the answers

What does the scatter diagram in Figure 16.1 illustrate?

The relationship between household current disposable income and consumer spending Signup and view all the answers

What does MPC represent in the context of an individual household's consumption function?

The change in consumer spending relative to a change in current disposable income Signup and view all the answers

In the consumption function equation c = a + MPC × yd, what does 'a' represent?

Autonomous consumer spending - what a household would spend with no disposable income Signup and view all the answers

What happens to individual household consumer spending if yd goes up by $1 according to Equation 16-7?

$1 increase in consumer spending by MPC Signup and view all the answers

Why is 'y' commonly used to represent income in macroeconomics?

'y' is reserved for investment spending Signup and view all the answers

What does the simple version of a consumption function represent in terms of individual household behavior?

How individual household's consumer spending changes with its current disposable income Signup and view all the answers

Why is it assumed that the constant term 'a' in the consumption function equation is greater than zero?

'a' reflects autonomous consumer spending, which assumes some consumption even with no disposable income Signup and view all the answers

'Delta c over Delta yd' is equivalent to which term in the context of Equation 16-6?

'MPC' Signup and view all the answers

What is the formula for the multiplier according to the text?

ΔY/ΔAAS Signup and view all the answers

How does the multiplier relate to the marginal propensity to consume (MPC)?

Higher MPC leads to a higher multiplier. Signup and view all the answers

Why do most economists believe the Great Depression was driven by a collapse in investment spending?

Because consumer spending fell drastically, impacting GDP. Signup and view all the answers

How did government programs and taxes during the Great Depression act as automatic stabilizers?

By boosting expenditures during times of low incomes. Signup and view all the answers

What was one of the main reasons for the change in the size of the multiplier from the Great Depression to modern times?

Increase in government spending and taxes. Signup and view all the answers

What percentage of total spending on final goods and services does consumer spending normally account for?

Two-thirds Signup and view all the answers

Which factor determines how large each round of expansion is compared with the previous round according to the text?

Marginal propensity to consume (MPC) Signup and view all the answers

What happened to consumer spending during the Great Depression?

It fell drastically. Signup and view all the answers

Current Disposable Income and Consumer Spending

Questions and Answers

What led to the boom period in Ft. Myers from 2003 to 2005?

What was a consequence of the halt in home construction in Ft. Myers?

How did workers in Ft. Myers contribute to the economic growth during the boom period?

What caused the prices of houses in Ft. Myers to rise to unsustainable levels during the boom?

Why did Ft. Myers experience a bust period after the boom?

What was one successful business venture during Ft. Myers' bust period?

What drives the business cycle, according to the text?

Which of the following is NOT a component of aggregate demand?

In the scenario presented in the text, what happens if home builders decide to spend an extra $100 billion on home construction?

What is the direct effect of an increase in investment spending, according to the text?

What is the primary consequence of changes in investment spending on consumer spending?

How does the text describe the relationship between investment and aggregate output?

Which of the following statements about the chain reaction described in the text is accurate?

What is assumed about producers' willingness to supply additional output?

Which of the following components is NOT considered when making simplifying assumptions?

In the given scenario, what happens as a result of an increase in household disposable income?

What is an autonomous change in aggregate spending?

What does the multiplier represent in economics?

How does the size of the multiplier change with a higher Marginal Propensity to Consume (MPC)?

What is the relationship between disposable income and consumer spending according to the text?

What determines how large each round of expansion is compared with the previous round?

What happens to real GDP as a result of an initial autonomous increase in aggregate spending?

How is the multiplier formula affected by the introduction of taxes and foreign trade?

What does MPS stand for in economics?

How does a boom in housing prices affect consumer spending according to the text?

How does an increase in investment spending affect real GDP?

What does MPC stand for in the context of consumer spending?

In the context of consumer spending, what does MPS represent?

If MPC equals 0.6, what happens to real GDP after the second round of consumer spending increase following a $100 billion investment?

What is the mathematical expression for the total effect on real GDP after multiple rounds of consumer spending following a $100 billion increase in investment spending?

What determines the amount of additional disposable income saved, affecting the subsequent rounds of consumer spending?

Following a second-round increase in consumer spending, how does real GDP change if MPS equals 0.4?

What is the relationship between MPC and MPS in terms of total disposable income?

What is the outcome of the chain reaction triggered by a $100 billion increase in investment spending?

Why is the total rise in real GDP limited to $250 billion even with multiple rounds of expansion?

How does an infinite series of 1 + x + x^2 + x^3 + ... resolve mathematically when x is between 0 and 1?

What is an autonomous change in aggregate spending?

How is the multiplier calculated?

How does the size of the multiplier vary with MPC?

What happens to disposable income 'leakage' in each round of expansion with a high MPC?

What limits the total rise in real GDP despite multiple rounds of expansion?

How is consumer spending affected by a boom in housing prices according to the text?

What determines the size of each round of expansion according to the text?

When does an autonomous change in aggregate spending occur?

What is the limit to the rise in real GDP despite multiple rounds of expansion?

What factor influences how much 'leaks out' into savings during each round of expansion?

What is the most important factor affecting a family's consumer spending?

What does the Bureau of Labor Statistics (BLS) collect data on regarding family income and spending?

What does the scatter diagram in Figure 16.1 illustrate?

What does MPC represent in the context of an individual household's consumption function?

In the consumption function equation c = a + MPC × yd, what does 'a' represent?

What happens to individual household consumer spending if yd goes up by $1 according to Equation 16-7?

Why is 'y' commonly used to represent income in macroeconomics?

What does the simple version of a consumption function represent in terms of individual household behavior?

Why is it assumed that the constant term 'a' in the consumption function equation is greater than zero?

'Delta c over Delta yd' is equivalent to which term in the context of Equation 16-6?

What is the formula for the multiplier according to the text?

How does the multiplier relate to the marginal propensity to consume (MPC)?

Why do most economists believe the Great Depression was driven by a collapse in investment spending?

How did government programs and taxes during the Great Depression act as automatic stabilizers?

What was one of the main reasons for the change in the size of the multiplier from the Great Depression to modern times?

What percentage of total spending on final goods and services does consumer spending normally account for?

Which factor determines how large each round of expansion is compared with the previous round according to the text?

What happened to consumer spending during the Great Depression?

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