Macroeconomics Chapter 11 Flashcards

Questions and Answers

The marginal propensity to consume (MPC) refers to the increase in _____ spending when disposable income increases by $1.

consumer

According to the table, what is the marginal propensity to consume (MPC)?

0.8

Autonomous consumer spending is the amount that a household would spend if it had _____ disposable income.

According to the graph, what is the amount of autonomous consumption?

$300 Signup and view all the answers

What is the aggregate consumption function if the marginal propensity to consume was 0.7 for a population of n identical individuals with an autonomous consumer spending of $100 and an average disposable income of $500?

C = n x 100 + n(0.7 x 500) Signup and view all the answers

According to the table, what is the multiplier?

5 Signup and view all the answers

_____ is the amount that a household would spend if it had zero disposable income.

Autonomous consumer spending Signup and view all the answers

What is referred to as the argument that consumers smooth their spending over a lifetime?

life-cycle hypothesis Signup and view all the answers

If a company produces 8,000 computers this month and sells 7,500 of them, then unplanned inventory investment is _____ computers.

500 Signup and view all the answers

In a closed economy with no taxes, if the marginal propensity to save is 0.25, then what is the multiplier?

4 Signup and view all the answers

Which statement is true regarding expenditure and income?

The marginal propensity to save is usually smaller than the marginal propensity to consume in an economy. Signup and view all the answers

Planned investment spending depends primarily on what?

interest rates, the expected future level of real GDP, and the current level of production capacity. Signup and view all the answers

If actual sales are greater than businesses expected, then what happens?

unplanned inventory investment decreases. Signup and view all the answers

If the current level of productive capacity is low, and firms expect sales to increase in the future, what will happen to investment spending?

increase Signup and view all the answers

If the multiplier is 5, then what must the marginal propensity to consume (MPC) be?

0.8 Signup and view all the answers

According to the table, autonomous consumption is $_____ .

200 Signup and view all the answers

If the firm finances investment spending out of retained earnings, then the interest rate is:

the opportunity cost of using those funds for a particular investment project. Signup and view all the answers

Which will MOST likely cause the consumption function to shift up?

the price of an average house increases Signup and view all the answers

As _ becomes larger, the multiplier becomes _.

the marginal propensity to consume (MPC); larger Signup and view all the answers

What is the marginal propensity to consume (MPC)?

amount spent on consumption, given an increase in disposable income of $1, all else being equal. Signup and view all the answers

During the financial crisis of 2008, given autonomous consumption spending of $1,000 and a marginal propensity to save (MPS) of 0.1, what is the new aggregate consumption value if disposable income drops from $5,000 to $2,500?

$3,250 Signup and view all the answers

What is unplanned inventory investment?

actual investment minus planned investment Signup and view all the answers

Study Notes

Marginal Propensity to Consume (MPC)

MPC measures the increase in consumer spending due to a $1 rise in disposable income.
Calculated by dividing change in consumer spending by change in disposable income.
Example value for MPC is 0.8, indicating consumers spend 80 cents of each extra dollar earned.

Autonomous Consumer Spending

Represents the amount spent by a household at zero disposable income, valued at $300 in a specific example.
Important in calculating aggregate consumption functions.

Aggregate Consumption Function

In a simplified economy, aggregate consumption can be expressed as: C = n x 100 + n(0.7 x 500), where 'n' represents the number of individuals.

Multiplier Effect

Multiplier calculates the total economic change resulting from an initial change in spending; related to MPC.
For an MPC of 0.25, the multiplier equals 4, implying a substantial effect on GDP.

Consumer Behavior

Households often smooth spending over their lifetime, following the life-cycle hypothesis, rather than fluctuating based on current income.
Positive sales results lead to a decrease in unplanned inventory investment, adjusting business expectations.

Investment Spending Influencers

Dependent on interest rates, anticipated future GDP, and present production capacity.
If capacity is low but future sales are expected to increase, investment spending is likely to rise.

Consumption Function Shifts

A rise in housing prices can increase the consumption function as wealth effecting behavior changes.

Financial Context

Retained earnings represent the opportunity cost in financing investment, essential in evaluating business decisions.

Financial Crisis Impact

The financial crisis of 2008 resulted in significant drops in expected disposable income and adjusted aggregate consumption values accordingly ($3,250 post-crisis).

Key Concept Definitions

Unplanned inventory investment calculated as actual investment minus planned investment can indicate market adjustments.
Understanding the relationship between MPC and the multiplier is vital; as MPC increases, so does the multiplier effect.

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Description

Test your knowledge of key concepts in Macroeconomics Chapter 11 with these flashcards. This practice set includes definitions and examples related to the marginal propensity to consume (MPC) and its implications for consumer spending. Perfect for review or quick study sessions.