Mr. Beck
|
SUNY College at Oneonta
|
Review Questions for Chapter 25-Solutions
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Review Questions for Economics
110
1. A stock market crash reduces the value of people's
assets, making them poorer. To replenish their lost wealth, households
will attempt to save more of their current income. To do this, they will
have to consume less. This decrease in consumption is shown by a shift
down in the entire consumption (C) line because
it is a reduction in consumption at the same level of disposable
income; that is, it is a reduction in consumption caused by something other
than a decrease in disposable income. The correct answer is b.
Note: If the cause
of the decrease in consumption had been a decrease in disposable income,
then the answer would have been a movement down and to the left along a
given consumption line.
Return to Question
1
2. To determine the marginal propensity to consume, we must first calculate
a 2nd value of consumption in addition to the value of consumption given
in row 2 of the table below.
Since Saving equals Disposable Income minus Consumption,
Consumption = Disposable income - Saving (consumption represents disposable
income not saved). Row 1 in the table below illustrates that consumption
will be $5,600 billion when disposable income is $7,000 billion. ($7,000
billion - $1,400 billion = $5,600 billion)
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$7,000 billion
|
$5,600 billion
|
$1,400 billion
|
|
$9,000 billion
|
7,160 billion
|
|
|
DDI = $9,000
- $7,000 = $2,000 billion
|
DC = $7,160 - $5,600 = $1,560 billion
|
|
Since the marginal propensity to consume (MPC) = DC/DDI
MPC = $1,560 billion/$2,000 billion = 0.78.
Return to Question
2
3. An shift upward in the entire consumption (C)
line is caused by something other than an increase in disposable income
which causes consumption to increase.
A stock market boom increases the value of people's
assets,
making them wealthier. This wealth effect means that households do not
feel that they have to save as much of their current income. They can afford
to consume more without worrying. This increase in consumption is shown
by a shift upward in the entire consumption (C) line
because it is an increase in consumption at the same level of disposable
income; that is, it is an increase in consumption caused by something other
than an increase in disposable income. The correct answer is b.
Return to Question
3
4. The marginal propensity to consume (MPC) represents
the portion of a change in disposable income which will be consumed. In
this example, an MPC of 0.70 indicates that for every $1 change in disposable
income, consumption will change by $0.70 in the same direction. Thus if
disposable income were to decrease by $1,000 (from $30,000 to $29,000),
consumption would change by $700 in the same
direction. This is calculated using the formula DC
= MPC x DDI
DC = 0.70 x (-1,000) = -$700.
Subtracting $700 from the family's current consumption amount of $25,000
yields:
$25,000 - $700 = $24,300.
Return to Question
4
5. To determine the marginal propensity to consume, we must first calculate
a 2nd value of consumption in addition to the value of consumption given
in row 1 of the table below.
Since Saving equals Disposable Income minus Consumption,
consumption = disposable income - saving (consumption represents disposable
income not saved). Row 2 in the table below illustrates that consumption
will be $6,000 billion when disposable income is $7,000 billion.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$5,000 billion
|
$4,900 billion
|
|
|
$7,000 billion
|
$6,000 billion
|
$1,000 billion
|
|
DDI = $7,000
- $5,000 = $2,000 billion
|
DC = $6,000 - $4,900 = $1,100 billion
|
|
Since the marginal propensity to consume (MPC) = DC/DDI
MPC = $1,100 billion/$2,000 billion = 0.55.
Return to Question
5
6. A shift upward in the entire consumption line is caused by
something other than a change in disposable income which causes households
to consume more. (If the change in consumption were caused by a change
in disposable income, it would be shown as a movement along a given consumption
line.) If households consume more of their disposable income, they would
save less because saving = disposable income - consumption. The correct
answer is d, households
save less because a stock market boom increases their wealth.
This decreased saving means increased consumption for some reason other
than an increase in disposable income.
Return to Question
6
7. At a disposable income level of $30,000, a consumer
spends exactly all her disposable income. If her disposable income were
to increase to $50,000, her consumption expenditures (C) would increase
to $44,000. What is the value of her marginal propensity to consume (MPC)?
(Round off your answer to the nearest hundredth [2 decimal places], if
necessary)
The first row in the table below indicates that when disposable income
= $30,000, consumption also = $30,000.
The marginal propensity to consume (MPC) can be determined by comparing
the change in consumption to the change in disposable income.
|
Disposable Income (DI)
|
Consumption (C)
|
|
$30,000
|
$30,000
|
|
$50,000
|
$44,000
|
|
DDI = $20,000
|
DC = $14,000
|
MPC = DC/DDI
= $14,000/$20,000 = 0.70.
Return to Question
7
8. As disposable income changes by $40,000 (from $40,000 to $80,000)
from point A to point N, the change in consumption can be determined by
the formula: DC = MPC x
DDI,
DC
= 0.80 x $40,000 = -$32,000.
Adding $32,000 to the level of consumption of $39,000 at point A yields
the level of consumption at point N: $39,000 + $32,000 = $71,000.
Return to Question
8
9. Since there are no taxes, disposable income (DI) is equal
to national income (Y).
Since Saving equals Disposable Income minus Consumption, we can determine
one's saving by computing consumption and subtracting that amount from
disposable income.
DC = MPC x DDI.
The MPC is equal to 0.70 in this problem.
As DI increases by $1,000 billion (from $8,000 billion to $9,000 billion),
DC
= 0.70 x $1,000 billion = $700 billion.
The amount of consumption spending is shown in the table below in column
2.
Since S = DI - C, the amount of saving (S) at a national income level
of $9,000 billion is calculated on the last row in column 3:
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$8,000 billion
|
$6,500 billion
|
|
|
DDI. = $1,000
billion
|
DC = $700 billion
|
|
|
$9,000 billion
|
$6,500 billion + $700 billion = $7,200 billion
|
$9,000 billion - $7,200 = $1,800 billion
|
Finally, the formula sheet indicates that (S/DI) x 100 = % of disposable
income saved.
At a disposable income level of $9,000 billion, saving is $1,800 billion.
($1,800 billion/$9,000 billion) x 100 = % of disposable income saved.
0.20 x 100 = % of disposable income saved.
20% = % of
disposable income saved.
Return to Question
9
10. To determine the marginal propensity to consume,
we must first calculate a 2nd value of consumption in addition to the value
of consumption given in row 2 of the table below.
Saving equals Disposable Income minus Consumption.
Row 1 in the table below illustrates that consumption will be $26,000 when
disposable income is $25,000. -$1,000 = $25,000 - $26,000.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$25,000
|
$26,000
|
-$1,000
|
|
$40,000
|
$38,000
|
|
|
DDI = $40,000
- $25,000 = $15,000
|
DC = $38,000 - $26,000 = $12,000
|
|
Since the marginal propensity to consume (MPC) = DC/DDI
MPC = $12,000/$15,000 = 0.80.
Return to Question
10
11.
DC = MPC x DDI.
The MPC is equal to 0.75 in this problem.
As DI increases by $40,000 (from $40,000 as given by point A to $80,000
as given by point N),
DC = 0.75 x $40,000 billion
= $30,000.
The graph indicates that consumption was $38,000 at point A. Adding
the DC of $30,000 yields the level of consumption
at point N of $38,000 + $30,000 = $68,000.
Return to Question
11
12. Since there are no taxes, disposable income (DI)
is equal to national income (Y). To determine the marginal propensity to
consume, we must first calculate a 2nd value of consumption in addition
to the value of consumption given in row 1 of the table below.
Since Saving equals Disposable Income minus Consumption,
consumption = disposable income - saving (consumption represents disposable
income not saved). Row 2 in the table below illustrates that consumption
will be $7,080 billion ($8,000 billion - $920 billion of saving)
when disposable income is $8,000 billion.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$7,000 billion
|
$6,320 billion
|
|
|
$8,000 billion
|
$7,080 billion
|
$920 billion
|
|
DDI = $1,000
billion
|
DC = $7,080 - $6,320 = $760 billion
|
|
Since the marginal propensity to consume (MPC) = DC/DDI
MPC = $760 billion/$1,000 billion = 0.76.
Return to Question
12
13. Since there are no taxes, disposable income (DI)
is equal to national income (Y).
DC = MPC x DDI
As disposable income decreases by $1,000 billion (from $8,000 billion
to $7,000 billion), consumption decreases by $750 billion.
DC = 0.75 x -$1,000 billion = -$750
billion.
Since consumption was $6,600 billion, the change in consumption of
-$750 billion will bring consumption down to $5,850 billion (=$6,600 billion
- $750 billion).
Saving equals Disposable Income minus Consumption. At a national income
of $7,000 billion, saving (S) = $7,000 billion of disposable income - $5,850
billion of consumption = $1,150 billion.
Return to Question
13
14. A shift upward in the entire consumption line refers to an
event other than a change in one's income which would make consumers increase
their spending.
Since income is measured on the horizontal axis,
a change in income would be shown by a movement along a given consumption
line and not a shift in the entire line.
If people save less of their income, then they are
spending more. Since Saving equals Disposable Income minus Consumption,
consumption = disposable income - saving (consumption represents disposable
income not saved). Thus, choice b,
people
save a smaller percent of their disposable income because of increased
job security, would be shown as a shift upward
in the entire consumption line. It represents an increase in consumption
for some reason other than a change in income.
Return to Question
14
15. When consumer confidence in the economy is low, the
security of workers' jobs is reduced. If people are afraid they may lose
their job, they will increase the amount saved out of their current income,
thereby reducing their consumption spending.
Since the decrease in consumption is caused by something
other than a change in people's current incomes, this would be shown by
a shift down in the entire consumption (C) line,
choice a.
Note: If the cause of the decreased consumption
had been a decrease in people's current income, then this would have been
shown as a movement down and to the left along a given consumption line.
Return to Question
15
16. Since disposable income (DI) in graphed on the
horizontal (X) axis of a consumption line, a movement along a given consumption
(C) line would only be caused by a change in disposable income. If disposable
income were to increase, it would be a movement up and to the right along
the consumption line, and, if disposable income were to decrease, it would
be a movement down and to the left along the consumption line.
Choice d, a decrease
in people's disposable income occurs as wages are decreased, would
cause a movement down and to the left along a given consumption line.
Return to Question
16
17. If people are wealthier, they do not have to save as
much of their current income to accumulate sufficient funds for retirement
or to meet other savings goals, such as accumulating funds to purchase
a house or provide for their children's college education. They can afford
to increase their consumption. However, since Saving (S) = Disposable income
(D.I.) - Consumption (C), the more dollars one consumes out of their disposable
income, the fewer dollars are available to be saved.
The correct answer is a,
households will increase consumption expenditures
(C), but decrease saving (S).
Return to Question
17
18. If households are convinced that rapid
inflationary price increases will soon occur, then they will have an incentive
to spend now while prices are lower so as to beat the price increase. The
only way to increase one's consumption (C) out of the same amount of disposable
income (DI) is to decrease one's saving (S). Since the increase in consumption
is caused by something other than a change in people's current incomes,
this would be shown by a shift up in the entire consumption
(C) line, choice b.
Note: If the cause of the increased consumption
had been an increase in people's current income, then this would have been
shown as a movement up and to the right along a given consumption line.
Return to Question
18
19. Since there are no taxes, disposable income (DI)
is equal to national income (Y).
Since Saving equals Disposable Income minus Consumption, we can determine
one's saving by computing consumption and subtracting that amount from
disposable income.
DC = MPC x DDI.
The MPC is equal to 0.75 in this problem.
As DI increases by $1,000 billion (from $8,000 billion to $9,000 billion),
DC
= 0.75 x $1,000 billion = $750 billion.
The amount of consumption spending is shown in the table below in column
2.
Since S = DI - C, the amount of saving (S) at a national income level
of $9,000 billion is calculated on the last row in column 3:
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$8,000 billion
|
$7,200 billion
|
|
|
DDI. = $1,000
billion
|
DC = $750 billion
|
|
|
$9,000 billion
|
$7,200 billion + $750 billion = $7,950 billion
|
$9,000 billion - $7,950 = $1,050 billion
|
Return to Question
19
20.
DC = MPC x DDI.
The MPC is equal to 0.76 in this problem.
From point A to point N, the change in disposable income is $120,000
- $60,000 = $60,000.
DC = 0.76 x $60,000.
DC = $45,600.
As disposable income increases by $60,000 (from $60,000 to $120,000),
consumption (C) increases by $45,600 (from $50,000 at point A to [$50,000
+ $45,600 = $95,600]
at point N.
Return to Question
20
21. A shift down in the entire consumption line represents
a decrease in consumption at the same level of disposable income; that
is, something other than a decrease in one's disposable income has caused
their consumption expenditures to decrease.
If workers fear that a recession
will soon occur which may cost them their job, they will increase
their saving immediately. (You save for a "rainy" day.). The only way to
increase your saving out of your current disposable income is to decrease
your amount of consumption expenditures. Saving (S) = Disposable income
(DI) - Consumption (C). This would be shown as a shift down in the entire
consumption line. The correct choice is d.
Return to Question
21
22. Since there are no taxes, disposable income (DI)
is equal to national income (Y). To determine the marginal propensity to
consume, we must first calculate a 2nd value of consumption in addition
to the value of consumption given in row 1 of the table below.
Since Saving equals Disposable Income minus Consumption,
consumption = disposable income - saving (consumption represents disposable
income not saved). Row 2 in the table below illustrates that consumption
will be $6,580 billion ($8,000 billion - $1,420 billion of saving)
when disposable income is $8,000 billion.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$9,000 billion
|
$7,240 billion
|
|
|
$8,000 billion
|
$6,580 billion
|
$1,420 billion
|
|
DDI = $1,000
billion
|
DC = $7,240 billion - $6,580 billion
= $660 billion
|
|
Since the marginal propensity to consume (MPC) = DC/DDI
MPC = $660 billion/$1,000 billion = 0.66.
Return to Question
22
23. Ms. Rivers unemployment compensation of $15,000 would represent
her disposable income (DI) if she loses her job.
DC = MPC x DDI
DC = 0.84 x (-$25,000). The -$25,000
represents the decrease in her disposable income from $40,000 to $15,000.
DC = - $21,000. This represents the change
in consumption as her income decreases from $40,000 to $15,000.
Mr. Rivers consumed $35,000 when her disposable income was $40,000.
Subtracting the $21,000 decrease in consumption from $35,000 yields ($35,000
- $21,000) = $14,000.
This represents her $ level of consumption after the loss of her job.
Return to Question
23
24. A consumption line is graphed with Consumption Expenditures
(C) on the vertical axis and Disposable Income (DI) on the horizontal axis.
A movement along a given consumption line would reflect a change in consumption
caused by a change in disposable income. Since DI is measured on the horizontal
axis, a movement to the left along a given consumption line would illustrate
a decrease in consumption as the result of a decrease
in people's disposable income, choice a.
All of the other choices would represent a change in consumption caused
by something other than a change in disposable income and would
be shown by a shift in the entire consumption line.
Return to Question
24
25. A shift in the entire consumption line down represents a
decrease in consumption caused by something other than a decrease
in disposable income. A shift down indicates there would be less consumption
at the same level of disposable income. Choice c,
the value of households’ assets (wealth) decrease
because of a decline in the stock market, would cause people to
consume less because they are poorer. To replenish their lost assets, people
would have to save more out of their current disposable income; that is,
they would have to reduce the proportion of their disposable income that
they consume. This is shown by a shift down in the entire consumption line.
Return to Question
25
26. The marginal propensity to consume (MPC) represents the proportion
of any change in disposable income which would be consumed. As disposable
income increases by $4,000 (from $40,000 to $44,000), the change in consumption
can be determined by the formula: DC = MPC x
DDI,
DC
= 0.80 x $4,000 = $3,200.
Adding $3,200 to the given amount of consumption of $36,000 yields the
level of consumption at a disposable income of $44,000: $36,000 + $3,200
= $39,200.
Return to Question
26
27. Saving (S) = Disposable Income (D.I.) - Consumption (C). Therefore,
Consumption (C) = Disposable income (D.I.) - Saving. In the middle row
in the table below, we solve for consumption when disposable income
is $7,500 billion. This enables us to determine the change in consumption
when disposable income changes from $6,000 billion to $7,500 billion.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$6,000 billion
|
$5,000 billion
|
|
|
$7,500 billion
|
$7,500 - $1,450 = $6,050
billion
|
$1,450 billion
|
|
DDI =7,500 - 6,000 = $1,500 billion
|
DC = 6,050 - 5,000 = $1,050 billion
|
|
The marginal propensity to consume (MPC) = DC/DD.I.
= $1,050 billion/$1,500 billion = 0.70.
Return to Question
27
28. Saving (S) = Disposable Income (D.I.) - Consumption (C).
We can calculate the $ amount of saving at a disposable income level of
$9,100 billion by first calculating the amount of consumption.
DC = MPC x DDI.
As DI increases by $1,600 billion (from $7,500 billion to $9,100 billion),
DC = 0.75 x $1,600 billion.
DC = $1,200 billion.
Adding the change in consumption of $1,200 billion to the given consumption
of $6,900 billion yields a level of consumption of $8,100 billion when
disposable income increases to $9,100 billion.
Saving = Disposable Income - Consumption
Saving = $9,100 billion - $8,100 billion.
Saving = $1,000 billion.
Return to Question
28
29. MPS = 1 - MPC.
Since the MPC is less than 1, then the MPS will be a positive number.
1 minus a number less than 1 will yield a positive value.
Since the MPC is a positive value, the MPS will have a value less than
1. Subtracting any number from 1 will yield a value less than 1.
The correct choice is therefore a, the
marginal
propensity to save (MPS) will be positive and less than 1.
Since both the MPC and the MPS are positive and less than 1, part of
any change in disposable income will be consumed and the other part will
be saved. It is impossible to know which part will be larger, however.
Return to Question
29
30. As a result of the events of September 11, households expected
the economy to go deeper into recession. If people are afraid that a severe
recession is imminent, they will become more cautious and save more of
their current disposable income. If households are saving more, they will
be consuming less of the same disposable income. This reduction in saving
would be shown by a shift down in the entire consumption
line, choice b.
Return to Question
30
31. Consumption expenditures are spending by U.S.
households, choice c. Note that if
the IBM computer were purchased by General Motors Corporation it would
be classified as investment expenditures (I); if it were purchased by the
U.S. government, it would be considered an example of Government purchases
of goods and services (G); and if it were purchased by a foreign government
or foreign citizen it would be counted as a U.S. export (X).
Return to Question
31
32.
Saving (S) = Disposable Income (D.I.) - Consumption (C). Therefore,
Consumption (C) = Disposable income (D.I.) - Saving. In the middle row
in the table below, we can solve for consumption when disposable income
is $8,500 billion by subtracting $1,200 billion from $8,500 billion.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$8,000 billion
|
$7,000 billion
|
|
|
$8,500 billion
|
$7,300 billion
|
$1,200 billion
|
|
DDI = $8,500
- $8,000 = $500 billion
|
DC = $7,300 - $7,000 = $300 billion
|
|
The marginal propensity to consume (MPC) = DC/DD.I.
= $300 billion/$500 billion = 0.60.
Return to Question
32
33. Since Disposable income is measured on the horizontal (X) axis,
a movement up and to the right along a given consumption (C) line can only
be caused by higher consumption resulting from an increase
in people's disposable income, choice f.
Return to Question
33
34. Consumption (C) = Disposable income (D.I.) - Saving.
Consumption (C) = $8,000 billion - $500 billion
Consumption (C) = $7,500 billion.
DC = MPC x DDI
The MPC is given as equal to 0.75 and the DDI
is $800 billion, the amount by which $8,800 billion exceeds $8,000 billion.
DC = 0.75 x $800 billion
DC = $600 billion.
Adding the DC of $600 billion to the $7,500
billion of consumption when disposable income was $8,000 billion yields:
Consumption = $7,500 billion + $600 billion = $8,100
billion when disposable income (DI) is $8,800 billion.
Return to Question
34
35. If people are afraid that the economy is heading into a recession
and there is increased risks of unemployment, they will become more cautious
and save more of their current disposable income. The expression, people
save for a rainy day, would apply in this case. If households are saving
more out of their current disposable income, they will be consuming less
of the same disposable income. The correct choice is d,
households increase saving (S), but decrease consumption
expenditures (C). This would be illustrated
by a shift down in the entire consumption line for the economy.
Return to Question
35
36.
Since the slope of the consumption line, the MPC, is equal to 0.80,
we can calculate how much more will be consumed at a disposable income
level of $100,000 (point N) than at $50,000 (point A).
DC = MPC x DDI.
Since disposable income increases by $50,000 from point A to point N,
DC = 0.80 x $50,000
DC = $40,000.
Adding the additional consumption of $40,000 to the $44,000 (the amount
of consumption at point A) yields a level of consumption (C) of $84,000
at point N.
Return to Question
36
37. If Mr. Robinson decreases his saving because of his confidence
that the economy will strengthen, then he is increasing his consumption
spending out of his current disposable income. This is shown by a shift
up in his entire consumption line.
As the economy improves, Mr. Robinson's disposable
income increases because his part-time job is upgraded to a full-time job.
This increase in his disposable income will enable him to increase his
consumption spending because consumption spending is directly (positively)
related to disposable income. An increase in consumption caused by an increase
in disposable income is shown by a movement up and to the right along
the new consumption line.
The correct choice is d,
as there is a shift up in his entire consumption
line followed by a movement up and to the right along the new consumption
line.
Return to Question
37
38. DC = MPC x DDI.
Since her disposable income decreases by $12,000 from $30,000 to $18,000,
we can calculate her reduction in consumption:
DC = 0.75 x (-$12,000)
DC = -$9,000.
Since she was consuming $26,000 before her reduction in disposable
income, her new level of consumption expenditures (C) after the loss of
her job will be:
$26,000 - $9,000 = $17,000.
Return to Question
38
39. Initially, Mr. Caldwell increases the amount he saves out
of his current disposable income. Since saving equals the amount of disposable
income not consumed, he increases his saving by decreasing his consumption.
Since his disposable income has not changed, this decrease in consumption
is shown by a shift down in the entire consumption line.
When Mr. Caldwell is laid off, his disposable income
decreases. As disposable income is measured on the horizontal axis, this
would be shown by a movement down and to the left along his
new consumption line
Graphically, Mr. Caldwell's changes are illustrated
below:
The correct choice is c,
there
is a shift down in his entire consumption
line followed by a movement down and to the left along the new consumption
line.
Return to Question
39
40. A shift up in the consumption line indicates that consumption has
increased at the same level of disposable income. Something other
than an increase in disposable income has caused consumption to rise.
Choice e
provides an explanation for this. If the value
of households' assets (wealth) increase because of higher stock market
values, then households can afford to consume
more (and save less) of their current disposable income because the higher
stock market values has already increased their total savings. They do
not have to devote as much of their current disposable income to saving.
Return to Question
40
41. Saving (S) = Disposable Income (D.I.) - Consumption (C). Therefore,
Consumption (C) = Disposable income (D.I.) - Saving. In the top row
in the table below, we can solve for consumption when disposable income
is $7,000 billion by subtracting the $400 billion of saving from
the $7,000 billion of disposable income.
|
Disposable Income (DI)
|
Consumption (C)
|
Saving (S)
|
|
$7,000 billion
|
$6,600 billion
|
$400 billion
|
|
$9,000 billion
|
$8,300 billion
|
|
|
DDI = $9,000
- $7,000 = $2,000 billion
|
DC = $8,300 - $6,600 = $1,700 billion
|
|
The marginal propensity to consume (MPC) = DC/DD.I.
MPC = DC/DD.I.
MPC = $1,700 billion/$2,000 billion = 0.85.
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41
42. Saving (S) = Disposable Income (D.I.) - Consumption (C). We can
calculate the $ amount of saving at a disposable income level of $8,600
billion by first calculating the amount of consumption.
DC = MPC x DDI.
As DI increases by $1,600 billion (from $7,000 billion to $8,600 billion),
DC = 0.75 x $1,600 billion.
DC = $1,200 billion.
Adding the change in consumption of $1,200 billion to the given consumption
of $6,100 billion yields a level of consumption of $7,300 billion when
disposable income increases to $8,600 billion.
Saving = Disposable Income - Consumption
Saving = $8,600 billion - $7,300 billion.
Saving = $1,300 billion.
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42
43. If households become optimistic about the economy, they will feel
more secure about keeping their jobs. This will reduce their need to "save
for a rainy day" because the risks of their disposable income falling are
greatly diminished. By saving less of their disposable income, households
will be able to consume a greater amount.
The correct choice is c,
households will increase consumption expenditures
(C), but decrease saving (S).
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43
44.
DC = MPC x DDI.
The MPC is equal to 0.78 in this problem.
From point A to point N, the change in disposable income is $100,000
- $50,000 = $50,000.
DC = 0.78 x $50,000.
DC = $39,000.
As disposable income increases by $50,000 (from $50,000 to $100,000),
consumption (C) increases by $39,000 (from $44,000 at point A to [$44,000
+ $39,000 = $83,000]
at point N.
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44
45. After the worker becomes unemployed, her disposable income
decreases by $16,000 (from $40,000 to $24,000).
DC = MPC x DDI.
The MPC is equal to 0.70 in this problem.
DC = 0.70 (-$16,000)
DC = -$11,200. Her consumption
decreases by $11,200 because her disposable income decreases by $16,000
Her level of consumption (after she becomes unemployed) will be $35,000
- $11,200 = $23,800.
Return to Question
45
46. Total Profits = Total Revenue - Total Cost. If the cost of producing
an item exceeds the price it is sold for, the firm incurs a loss on the
sale of the item. A loss represents a negative profit.
The correct choice is c.
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46
47. Part of one's income earned must typically
be paid to the government in the form of taxes. On the lower flow of the
circular flow diagram, tax dollars flow directly to government. The correct
choice is e.
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47
48. As shown in the circular flow diagram,
when households save instead of consume, they put dollars into the financial
system which includes banks. Thus, saving (S)
represents dollars flowing directly into the financial system. The correct
choice is b.
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48
49. Households provide
resources to businesses and thereby earn income. After paying taxes to
the government, the after-tax
disposable income
flows directly to households. The correct answer is choice e.
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49
50. Saving (S) is disposable
income which households elect not to spend. Whereas consumption expenditures
represent the dollars that households spend on goods and services produced
by businesses, saving (S) represents the dollars
which flow directly from households to the financial system. The correct
choice is e.
Return to Question
50
51. When people in the
United States purchase goods and services produced abroad, we import these
products. Whereas foreign products are flowing into the U.S., dollars used
to purchase these products are flowing to the rest of the world.
The circular flow measures the $ flows. Therefore imports (IM)
represent $ which flow from the U.S. directly to the rest of the world.
The correct choice is c.
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51
.52. Investment
expenditures (I) are $ spent by businesses on new capital goods used in
production.
None of the choices is considered
an example of investment expenditures (choice f).
Let's examine each choice in turn:
a. This is an example of an import of goods produced abroad.
b. This is an example of saving by households. "Investing" in the stock
market is not considered investment expenditures by the national income
accountant because it does not represent spending on new capital goods,
such as machinery and buildings.
c. This is an example of consumption expenditures.
d. This is an example of saving by General Motors. General Motors is
not purchasing new computers from Dell.
e. This is an example of government purchases of goods and services
(G).
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52
.53. Investment expenditures
represent spending by business firms on new capital goods so as to improve
the ability of businesses to produce goods and services. Examples would
be spending on new machinery, equipment, and buildings.
The purchase of a new computer
by General Motors Corporation is an example of an investment expenditure,
as it is a business expenditure on a new capital good.
The correct answer is choice e.
Return to Question
53
54. $ spent on goods and
services produced in the U.S. flow directly to U.S. businesses, regardless
of the source of these dollars. Exports (X),
choice
b, represent $ spent by foreigners
on goods and services produced by U.S. businesses and thus are shown in
the circular flow diagram as flowing directly to U.S. businesses.
Return to Question
54
55. Gross private domestic
investment (I) represents the purchase by U.S. businesses of new capital
goods, plant and equipment, produced in the U.S.. A new Dell computer purchased
by a business, choice
f,
is considered an investment item.
Note that the same new Dell computer would be
considered government spending (G) if purchased by the government; consumption
spending (C) if purchased by a U.S. household; and exports (X) if purchased
by a foreign business.
Return to Question
55
56.
Investment expenditures (I) represent $ spent by U.S. businesses
on new capital goods, plant and equipment, produced in the U.S. Since investment
expenditures are $ spent on capital goods produced in the U.S., these $
flow directly to U.S. businesses (producers). The correct choice is f.
Return to Question
56
57. The basic macroeconomic
identity, always true by definition, is that output always equals income.
If the item was sold for $3,000, then it represents $3,000 worth of
output produced. Since output always equals income, exactly $3,000
of income is earned in the production of this item. The correct choice
is c.
Return to Question
57
58. The basic macroeconomic identity,
always true by definition, is that output always equals income.
If the item was sold for $4,500, then it represents $4,500 worth of
output produced. Since output always equals income, exactly $4,500
of income is earned in the production of this item.
Both wages of $3,500 and profits of $1,000 are examples
of income earned. Adding $3,500 + $1,000 yields $4,500. The correct choice
is d.
Return to Question
58
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