Consumption and Saving
What do we call the baseline spending a household must do to survive, even if their income is exactly zero?
Autonomous Consumption (On the consumption or saving function, this is your y-intercept)
What do we call the stock of unsold goods that a firm has sitting in its warehouse awaiting sale?
Inventory (When we talk about investment in this chapter, we refer to inventory)
Write the equation for Planned Aggregate Expenditure
C + I (Consumption + Planned Investment)
If the Marginal Propensity to Save (MPS) is 0.25, calculate the exact value of the investment multiplier.
4 (Multiplier is 1 divided by MPS)
1 / 0.25 = 4
What does the acronym MPC stand for?
Marginal Propensity to Consume (It is always a decimal or fraction)
When a firm accidentally produces more goods than consumers actually buy, what happens to their unplanned investment?
It increases (Unplanned investment can look like leftover unsold inventory, which was not orignally planned for)
In macroeconomic equilibrium, Aggregate Output (Y) must be perfectly equal to what other variable?
Planned Aggregate Expenditure (Remember income Y should not be confused with the y-axis)
If the Marginal Propensity to Consume (MPC) is 0.9, calculate the exact value of the investment multiplier.
10 (Find MPS and use 1/MPS to solve)
1 - 0.9 = 0.1
1/0.1 = 10
If a student gets a $100 bonus at work and decides to save $20 of it, what is their exact Marginal Propensity to Consume (MPC)?
0.8 (The ratio of income that is spent versus saved)
What is the formula for calculating Actual Investment
Planned Investment + Unplanned Inventory Change
If Planned Aggregate Expenditure is greater than Aggregate Output, is the economy in equilibrium?
Assume the multiplier is 5. If a business decides to increase their planned investment by $10 million, by how much will the total equilibrium output eventually increase?
$50 million (Multiplier is multiplied by changes in investment)
5 * 10,000,000 = 50,000,000
State the mathematical relationship between the Marginal Propensity to Consume and the Marginal Propensity to Save.
MPC + MPS = 1 (Income can only either be spent or saved)
What specific type of relationship exists between the interest rate and planned investment?
An inverse or negative relationship (As interest increase, investment decreases and vice versa)
If businesses see their unplanned inventory rapidly shrinking, what will they immediately do to their production level?
Increase the level of production
A country produces an output of $1,000. Consumers spend $800, and businesses plan to invest $150. Calculate the Unplanned Inventory.
$50.
Planned aggregate expenditure is spending plus investment. The difference between that and income/output is unplanned inventory/investment.
800 + 150 = 950
1000-950 = 50
If a person's income is exactly zero, and their autonomous consumption is $500, what is their total saving?
-$500 or they are dissaving $500 (With no income, people still need to spend to survive, which may look like taking on debt or dipping into savings)
If the Federal Reserve increases the interest rate from 3% to 8%, will a business increase or decrease their planned investment in new factories?
Decrease (Intrest is the cost of investment, meaning an increase in interest makes investing more expensive)
Equilibrium is when saving is equal to investment
If Autonomous Consumption is $200, the MPC is 0.8, and total Income is $1,000, calculate Total Consumption.
$1000
Think income can only be either saved or consumed.
MPC tells us how much is consumed (0.8 * 100 = 800)
Autonomous consumption happens no matter what income (where income = 0 or y-intercept on graph)
200 + 800 = 1000