Chapter 15

Question 1

Define Savings

Answer 1

Economists define savings (S) as not spending or part of disposable incomes (Yd) not consumed

Question 2

What is the relationship between income and consumption?

Answer 2

There is a positive relationship between your income level and the amount you consume. The more consumers earn (after tax), the more they spend

Question 3

What is the relationship between income and savings?

Answer 3

There is a positive relationship between income and savings. The more the consumer earns the more income they can save

Question 4

What does the consumption schedule show?

Answer 4

The consumption schedule reflects the direct consumption-disposable income relationship.

Question 5

What is the relationship between savings and disposable income?

Answer 5

There is a direct relationship between saving and Yd.
Savings is not spending, it’s the part of disposable income not consumed. It’s the part of the income left over after consumption

Question 6

How is disposable income calculated?

Answer 6

Disposable income (Yd) = the total income (Y) - taxes(T) and Yd = C + S

Question 7

What is the key determinant of consumption?

Answer 7

Disposable income is the key determinant of consumption. It is the personal consumers income after tax

Question 8

What is MPC?

Answer 8

The proportion or fraction of any change in the income consumed is called the marginal propensity to consume (MPC). Marginal propensity to consume (MPC) measures when a change in income happens by what proportion does your consumption change

Question 9

How do you calculate MPC?

Answer 9

MPC = Change in Consumption/Change in income

Question 10

What is MPS?

Answer 10

The fraction of any change saved is the marginal propensity to save (MPS). Marginal prosperity to save (MPS) measures when a change in income happens by what proportion does your savings change

Question 11

How do you calculate MPS?

Answer 11

MPS = Change in Savings/Change in income

Question 12

What does MPC and MPS calculate?

Answer 12

Your MPS and MPC should always equal 1 (MPC + MPC = 1)

Question 13

What is exogenous consumption?

Answer 13

Exogenous consumption (C0) is the amount we will spend when our income is 0. It is unrelated to our level of income and stays the same despite our level of income. Exogenous savings is the amount of savings when our consumption is zero.

Question 14

How is wealth as a determinant of disposable income?

Answer 14

Wealth means the value of both real assets and financial assets. Households save to accumulate wealth. When events boost the value of existing wealth, households increase their spending and reduce their savings. Wealth effect shifts the consumption schedule upward and the saving schedule downwards

Question 15

How is exceptions as a determinant of disposable income?

Answer 15

Exceptions means household exceptions about future prices and income may affect current spending and saving.

Question 16

How is interest rates as a determinant of disposable income?

Answer 16

Interest rates fall, households tend to borrow more, consume more and save less. A lower interest rate diminishes the incentive to save, these effects are very modest, the lower interest rates shift the consumption schedule upward and the savings schedule slightly upward and the saving schedule slightly downward. Higher interest rates do the opposite

Question 17

How is household debts as a determinant of disposable income?

Answer 17

Household debt is a percentage of disposable income is held constant, When consumers increase their household debt, they came increase current consumption at each level of Yd. Reducing borrowing shifts the consumption schedule downward.

Question 18

What are the determinants of disposable income?

Answer 18

The determinants are:
Wealth
Exceptions
Interest rates
Household debt

Question 19

What does disposable income help determine?

Answer 19

The amount of disposable income is the basic determinant of the amount households will consume and save.

Question 20

What is the marginal benefit and marginal cost of investments?

Answer 20

The marginal benefit from investment is the expected rate of return businesses hope to realise. The marginal cost is the interest rate that must be paid for borrowed funds.

Question 21

What should the interest rates be when should businesses invest in projects?

Answer 21

If the expected rate of return exceeds the interest rate the investment should be undertaken. If the interest rate exceeds the expected rate of return the investment should not be undertaken. Firms undertake investment decisions up until the point where r = i and where r exceeds i.

Question 22

What are the two interest rates?

Answer 22

Different rates of interest:
- Expected rate of return (r) - Investment spending is guided by profit motive, businesses buy capital goods only when they think such purchases will be profitable. It is not a guaranteed rate of return
- The real interest rate (i)- Real interest rate is the nominal interest less the rate of inflation. The interest cost if the investment is computed by multiplying the interest rate, i.

Question 23

What is the relationship between real interest rate and quality of investing?

Answer 23

Their is an inverse relationship between the real interest rate (the financial price of investing) and the quality of Investing (I) demanded

Question 24

What is the marginal benefit marginal cost rule?

Answer 24

Marginal benefit marginal cost rule is that investment projects should be undertaken up to the point where r = i.

Question 25

What is the multiplier?

Answer 25

The multiplier is the ratio of a change in the equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand. It’s the number by which a change in such a component must be multiplied to find the resulting change in the equilibrium GDP.

Question 26

How do you calculate multiplier

Answer 26

Multiplier (k) = Change in real GDP/Initial Change in Spending

Question 27

How do you calculate change in GDP?

Answer 27

Change in GDP = k x change in spending

Question 28

What is the relationship between GDP and spending?

Answer 28

There is a direct relationship between GDP and spending. An increase in initial spending may lead to a multiple increase in real GDP and similarly a decrease in autonomous spending may result a larger decrease in GDP

Question 29

What are the two facts of the multiplier effect?

Answer 29

• The economy supports repetitive, continuous flows of expenditures and income through which rand’s are spent
• Any change in income will vary both consumption and savings in the same directions and by function of the change in income

Question 30

What is the relationship between MPS, MPC and multiplier?

Answer 30

The MPC and the multiplier are directly related and MPS and the multiplier are inversely related.

Question 31

What does the initial change in autonomous spending do to the multiplier?

Answer 31

The initial change in autonomous spending is usually associated with investment spending and results from a change in the real interest rate and/or a shift of the investment demand curve. The multiplier works in both directions. Initial changes in spending produce magnified changes in output and income

Question 32

How do you calculate the multiplier in terms of MPS?

Answer 32

Multiplier (k) = 1/MPS

Question 32

How do you calculate the multiplier in terms of MPC?

Answer 32

Multiplier (k) = 1/ (1- MPC)

Question 33

What is the 45 degree line on the consumption and disposable income graph?

Answer 33

Any point on the 45 degree line, consumption would equal disposable income. C = Yd

Question 34

What is the break even income?

Answer 34

Break-even income is when the income level; at which households plan to consume their entire incomes

Question 35

What does it mean when consumption and disposable income are equal?

Answer 35

The point where consumption and disposable income are equal means that there is no savings and it’s equal to zero.

Question 36

What does it mean when your consumption function line is below 45 degrees?

Answer 36

Your consumption function line is below the 45 degree line, then you are spending less than your disposable income and you are saving.

Question 37

What does it mean when your consumption function line is above 45 degrees?

Answer 37

If your consumption function line is above your 45 degree line then consumption is greater than disposable income and you are dissavings.

Question 38

How can households consume more than their income?

Answer 38

Households can consume more than their incomes by liquidation of accumulated wealth or by borrowing.

Question 39

What is the vertical distance between consumptions schedule and the 45 degree line measure?

Answer 39

The vertical distance between the consumption schedule and the 45 degree line measures saving as does the vertical distance between the savings schedule and the horizontal axis.