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.
Graph Question 11 solution

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.
Graph question 20 solution

    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.
Graph question 36 solution

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:

Graph question 39 solution

    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.
Return to Question 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.
Return to Question 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).
Return to Question 43


44.
Graph question 44 solution

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.
Return to Question 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.
Return to Question 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.
Return to Question 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.
Return to Question 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.
Return to Question 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.
Return to Question 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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.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.
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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.
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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.
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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.
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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.
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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.
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