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Questions and Answers
The marginal propensity to consume (MPC) refers to the increase in _____ spending when disposable income increases by $1.
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)?
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.
Autonomous consumer spending is the amount that a household would spend if it had _____ disposable income.
$0
According to the graph, what is the amount of autonomous consumption?
According to the graph, what is the amount of autonomous consumption?
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?
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?
According to the table, what is the multiplier?
According to the table, what is the multiplier?
_____ is the amount that a household would spend if it had zero disposable income.
_____ is the amount that a household would spend if it had zero disposable income.
What is referred to as the argument that consumers smooth their spending over a lifetime?
What is referred to as the argument that consumers smooth their spending over a lifetime?
If a company produces 8,000 computers this month and sells 7,500 of them, then unplanned inventory investment is _____ computers.
If a company produces 8,000 computers this month and sells 7,500 of them, then unplanned inventory investment is _____ computers.
In a closed economy with no taxes, if the marginal propensity to save is 0.25, then what is the multiplier?
In a closed economy with no taxes, if the marginal propensity to save is 0.25, then what is the multiplier?
Which statement is true regarding expenditure and income?
Which statement is true regarding expenditure and income?
Planned investment spending depends primarily on what?
Planned investment spending depends primarily on what?
If actual sales are greater than businesses expected, then what happens?
If actual sales are greater than businesses expected, then what happens?
If the current level of productive capacity is low, and firms expect sales to increase in the future, what will happen to investment spending?
If the current level of productive capacity is low, and firms expect sales to increase in the future, what will happen to investment spending?
If the multiplier is 5, then what must the marginal propensity to consume (MPC) be?
If the multiplier is 5, then what must the marginal propensity to consume (MPC) be?
According to the table, autonomous consumption is $_____ .
According to the table, autonomous consumption is $_____ .
If the firm finances investment spending out of retained earnings, then the interest rate is:
If the firm finances investment spending out of retained earnings, then the interest rate is:
Which will MOST likely cause the consumption function to shift up?
Which will MOST likely cause the consumption function to shift up?
As _____ becomes larger, the multiplier becomes _____.
As _____ becomes larger, the multiplier becomes _____.
What is the marginal propensity to consume (MPC)?
What is the marginal propensity to consume (MPC)?
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?
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?
What is unplanned inventory investment?
What is unplanned inventory investment?
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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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