Chapter 21

Question 1

Categories of Consumption

Answer 1

• Durable goods.
• Nondurable goods.
• Services.

Question 2

Personal Saving

Answer 2

Disposable Income - Consumption

Question 3

Saving Function

Answer 3

Relationship between the disposable income (x-axis) and level of saving (y-axis).

Question 4

Marginal Propensity to Consume (MPC)

Answer 4

The extra amount that people consume when an extra dollar of disposable income is received.

Question 5

Marginal Propensity to Save (MPS)

Answer 5

The fraction of an extra dollar that goes to extra saving.

Question 6

MPC Function

Answer 6

MPC = MC / MI

Question 7

MPS Function

Answer 7

MPS = MS / MI

Question 8

Relationship between MPC and MPS

Answer 8

Mirror images.

MPC + MPS =1

Question 9

Determinants of Income

Answer 9

• Disposable Income.
• Permanent Income.
• Life-Cycle Hypothesis.
• Wealth.

Question 10

Permanent Income Theory

Answer 10

When a change in income is permanent (promotion), people consume more. When the change is transitory (bonus), people save more.

Question 11

Life-Cycle Hypothesis

Answer 11

Assumes that people save fractions of their income to smooth consumption later on (after retirement).

Question 12

Wealth Effect

Answer 12

Higher wealth (could be inherited for example), leads to higher consumption.

Question 13

Determinants of Investment

Answer 13

• Interest Rates.
• State of the economy.
• Changes in output caused by this investment.

Question 14

Investment Demand Curve

Answer 14

Relationship between interest rates and investment.