Actually 10

Question 1

What is the relationship between income and consumption?

Answer 1

Consumption has a direct (positive) relationship with income. Higher income generally leads to higher consumption.

Question 2

How is personal saving calculated?

Answer 2

Personal Saving = Disposable Income (DI) - Consumption (C).

Question 3

What does the 45° line represent in the income-consumption graph?

Answer 3

It shows points where consumption (C) equals disposable income (DI), indicating no saving or dissaving.

Question 4

What is the “break-even income” level?

Answer 4

It’s the level of income where consumption equals disposable income (C = DI), resulting in zero saving.

Question 5

Define the Average Propensity to Consume (APC) and Average Propensity to Save (APS).

Answer 5

APC = Consumption ÷ Disposable Income
APS = Saving ÷ Disposable Income

Question 6

What are the formulas for Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)?

Answer 6

MPC = Change in Consumption ÷ Change in Disposable Income
MPS = Change in Saving ÷ Change in Disposable Income

Question 7

What is the relationship between APC and APS?

Answer 7

APC + APS = 1 for any level of disposable income.

Question 8

How do non-income factors like wealth and expectations affect consumption?

Answer 8

Increased wealth leads to higher consumption (wealth effect).
Positive expectations about future income or prices can increase current consumption.

Question 9

What happens to the consumption schedule when borrowing increases?

Answer 9

It shifts upward because households can spend beyond their current disposable income.

Question 10

What impact do real interest rates have on consumption and saving?

Answer 10

Low real interest rates encourage consumption and reduce saving.
High real interest rates encourage saving and reduce consumption.

Question 11

What determines whether firms will invest in new projects?

Answer 11

Firms invest if the expected rate of return (r) is greater than the real interest rate (i).

Question 12

How is the real interest rate calculated?

Answer 12

Real Interest Rate = Nominal Interest Rate - Inflation Rate.

Question 13

What is the shape of the investment demand curve, and why?

Answer 13

It slopes downward, indicating an inverse relationship between real interest rates and investment levels.

Question 14

What causes shifts in the investment demand curve?

Answer 14

Changes in business taxes, technological advances, capital stock, planned inventory changes, and expectations.

Question 15

What is the multiplier effect in macroeconomics?

Answer 15

It’s the process by which an initial change in spending leads to a larger change in GDP.

Question 16

What is the formula for the multiplier based on the MPC?

Answer 16

Multiplier = 1 ÷ (1 - MPC)

Question 17

If the MPC is 0.75, what is the multiplier?

Answer 17

Multiplier = 1 ÷ (1 - 0.75) = 4

Question 18

How do taxes and imports affect the multiplier effect?

Answer 18

They reduce the multiplier by diverting spending away from domestic goods and services.

Question 19

What are some real-world factors that can reduce the multiplier effect?

Answer 19

Taxes, inflation, and imports can reduce the impact of the multiplier on GDP.

Question 20

What is the relationship between MPC and MPS?

Answer 20

MPC + MPS = 1 for any change in disposable income.