Chapter 12

Question 0

Consumption

Answer 0

Spending on new goods and services out of a household’s current income. Whatever is not consumed is saved. Consumption includes such things as buying food and going to a concert.

Question 1

Real Disposable income

Answer 1

Real GDP minus net taxes, or after-tax real income

Question 2

Saving

Answer 2

The act of not consuming all of one’s current income. Whatever is not consumed out of spendable income is, by definition, saved. Saving is an action measured over time (a flow), whereas savings are a stock, an accumulation resulting from the act of saving in past.

Question 3

Consumption goods

Answer 3

Goods bought by households to use up, such as food and movies

Question 4

Investment

Answer 4

Spending by businesses on things such as machines and buildings, which can be used to produce goods and services in the future. The investment part of real GDP is the portion that will be used in process of producing goods in the future

Question 5

Capital goods

Answer 5

Producer durables; non-consumable goods that firms use to make other goods

Question 6

Consumption function

Answer 6

The relationship between amount consumed and disposable income. A consumption function tells us how much people plan to consume at various levels of disposable income

Question 7

Dissaving

Answer 7

Negative saving; a situation in which spending exceeds income. Dissaving can occur when a household is able to borrow or use existing assets

Question 8

45-degree reference line

Answer 8

The line along which planned real expenditures equal real GDP per year.

Question 9

Autonomous consumption

Answer 9

The part of consumption that is independent of (does not depend on) the level of disposable income. Changes in autonomous consumption shift the consumption function

Question 10

Average propensity to consume (APC)

Answer 10

Real consumption divided by real disposable income; for any given level of real income, the proportion of total real disposable income that is consumed

Question 11

Average propensity to save (APS)

Answer 11

Real saving divided by real disposable income; for any given level or real income, the proportion of total real disposable income that is saved

Question 12

Marginal propensity to consume (MPC)

Answer 12

The ratio of the change in consumption to the change in disposable income. A marginal propensity to consume of 0.8 tells us that an additional $100 in take-home pay will lead to an additional $80 consumed.

Question 13

Marginal propensity to save (MPS)

Answer 13

The ratio of the change in saving to the change in disposable income. A marginal propensity to save of 0.2 indicates that out of an additional $100 in take-home pay, $20 will be saved. Whatever is not saved is consumed. The marginal propensity to save plus the marginal propensity to consume must always equal 1, by definition

Question 14

Wealth

Answer 14

The stock of assets owned by a person, household, firm, or nation. For a household, wealth can consist of a house, cars, personal belongings, stocks, bonds, bank accounts, and cash.

Question 15

Lump-sum tax

Answer 15

A tax does not depend on income. An example is a $1,000 tax that every household must pay, irrespective of its economic situation

Question 16

Multiplier

Answer 16

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures; the number by which a change in autonomous real investment or autonomous real consumption, for example, is multiplied to get the change in equilibrium real GDP