chapter 8 - consumption, saving, investment, and the multiplier

Q: saving function

the relationship between saving and income (saving = y; disposable income = x)

question

disposable income (DI)

answer

what consumers have left over to spend or save once they have paid out their net taxes; the most important element affecting consumption and savings

question

answer

= Gross income - net taxes

question

consumption and saving schedules

answer

are direct relationships between disposable income and consumption and savings; as DI increases for a typical household, C and S both increase

question

liquidate wealth

answer

selling assets

question

consumption function

answer

an equation showing how an individual household's consumer spending varies with the household's current disposable income

(consumption = y; disposable income = x)

question

autonomous consumption (base consumption)

answer

consumption spending that is not related to the level of disposable income; when DI = 0 (the y-intercept)

question

...

answer

at incomes below $200, the consumer is spending more than his income

=> saving is negative (dissaving)

at incomes above $200, the consumer is spending less than his income

=> saving is positive

question

saving function

answer

the relationship between saving and income

(saving = y; disposable income = x)

question

autonomous saving

answer

the amount of saving that occurs no matter the level of disposable income; appears as the y-intercept (when DI = 0)

question

...

answer

with zero disposable income, the family would need to borrow $40 to consume $40 worth of goods

question

marginal propensity to consume (MPC)

answer

the change in consumption caused by a change in disposable income; how much you are willing to spend when given $1/the additional portion of income that is spent

question

MPC formula

answer

change in consumption/change in income

question

marginal propensity to save (MPS)

answer

the change in saving caused by a change in disposable income/the additional portion of income that is saved

question

MPS formula

answer

change in saving/change in income; 1-MPC

question

marginal propensity to consume and save

answer

MPC + MPS = 1

for every dollar not consumed, it i saved

question

MPC and MPS relationship

answer

wealth, expectations, household debt, taxes

question

determinants of consumption and saving

answer

when accumulated wealth increases

- consumption functions shift upward

- saving functions shift downward

(household can sell stock/other assets to consume more goods at the level of disposable income)

question

wealth

answer

uncertainty/low expectation about future income

- decrease consumption

- increase saving

question

expectations

answer

- increase consumption by the act of borrowing

- decrease consumption when paying off debt

question

household debt

answer

- consumption and saving change in the same direction

(increases taxes then both go down because income goes to the government)

(decreases taxes then both go up there's more to spend)

question

taxes and transfers

answer

at all levels of disposable income, consumption is greater (CHigh); saving is lower (SLow)

question

upward shift in consumption

answer

at all levels of disposable income, consumption is lower (CLow); saving is higher (SHigh)

question

downward shift in consumption

answer

the other source of private domestic spending

question

investment

answer

if r% (real rate of return) > i% (real rate if interest)

question

make the investment

answer

if r% < i%

question

do not make the investment

answer

i = r

question

rational investment

answer

(assuming that investment spending (I) is determined from the investment demand curve and is constant at all levels of GDP)

question

investment demand curve

answer

a horizontal line with GDP on the x-axis and investment on the y-axis

question

autonomous invesment

answer

the relationship between saving and investment

question

market for loanable funds

answer

the inverse relationship (negative correlation) between investment and the real interest rate.

(interest falls, borrowing becomes less costly, and there is an increase in investment)

question

demand for loanable funds (investment demand curve)

answer

the positive relationship between the savings on households (both domestic and foreign) and the real interest rate; comes from saving and lending

question

supply of loanable funds

answer

y-axis: real interest rate

x-axis: loanable funds ($)

intersection of demand and supply curve: equilibrium interest rate

question

market for loanable funds graph

answer

the real interest rate where dollars saved equals dollars invested

question

equilibrium

answer

a change in any component of autonomous spending creates a large change in GDP

question

multiplier effect

answer

= 1/(1-MPC)

question

spending multiplier (when MPC is given)

answer

= 1/MPS

question

spending multiplier (when MPS is given)

answer

government spending (G); net exports (X-M)

question

public and foreign sectors

answer

when the government injects money into the economy, it multiplies by the spending multiplier to get the money added in new GDP

question

government spending (G)

answer

when the government injects money into the economy, it multiplies by the spending multiplier to get the money added in new GDP

question

net exports (X-M)

answer

increase MPC and MPS

question

decrease in taxes

answer

- MPC/MPS

- MPC/(1-MPC)

question

the multiplier effect in taxes

answer

- spending multiplier works as soon as there is a change in autonomous spending (C,G,I,(X-M))

- tax multiplier must first go through a person's consumption function as disposable income

question

tax multiplier (Tm)

answer

- the factor by which a change in both spending and taxes changes real GDP by the government

- is always equal to 1

question

difference in multipliers

answer

more spending

question

balanced budget multiplier

answer

less spending

question

increase in income

answer

undefined

question

increase in taxes

answer

undefined

1 of 47

question

disposable income (DI)

answer

what consumers have left over to spend or save once they have paid out their net taxes; the most important element affecting consumption and savings

question

answer

= Gross income - net taxes

question

consumption and saving schedules

answer

are direct relationships between disposable income and consumption and savings; as DI increases for a typical household, C and S both increase

question

liquidate wealth

answer

selling assets

question

consumption function

answer

an equation showing how an individual household's consumer spending varies with the household's current disposable income

(consumption = y; disposable income = x)

question

autonomous consumption (base consumption)

answer

consumption spending that is not related to the level of disposable income; when DI = 0 (the y-intercept)

question

...

answer

at incomes below $200, the consumer is spending more than his income

=> saving is negative (dissaving)

at incomes above $200, the consumer is spending less than his income

=> saving is positive

question

saving function

answer

the relationship between saving and income

(saving = y; disposable income = x)

question

autonomous saving

answer

the amount of saving that occurs no matter the level of disposable income; appears as the y-intercept (when DI = 0)

question

...

answer

with zero disposable income, the family would need to borrow $40 to consume $40 worth of goods

question

marginal propensity to consume (MPC)

answer

the change in consumption caused by a change in disposable income; how much you are willing to spend when given $1/the additional portion of income that is spent

question

MPC formula

answer

change in consumption/change in income

question

marginal propensity to save (MPS)

answer

the change in saving caused by a change in disposable income/the additional portion of income that is saved

question

MPS formula

answer

change in saving/change in income; 1-MPC

question

marginal propensity to consume and save

answer

MPC + MPS = 1

for every dollar not consumed, it i saved

question

MPC and MPS relationship

answer

wealth, expectations, household debt, taxes

question

determinants of consumption and saving

answer

when accumulated wealth increases

- consumption functions shift upward

- saving functions shift downward

(household can sell stock/other assets to consume more goods at the level of disposable income)

question

wealth

answer

uncertainty/low expectation about future income

- decrease consumption

- increase saving

question

expectations

answer

- increase consumption by the act of borrowing

- decrease consumption when paying off debt

question

household debt

answer

- consumption and saving change in the same direction

(increases taxes then both go down because income goes to the government)

(decreases taxes then both go up there's more to spend)

question

taxes and transfers

answer

at all levels of disposable income, consumption is greater (CHigh); saving is lower (SLow)

question

upward shift in consumption

answer

at all levels of disposable income, consumption is lower (CLow); saving is higher (SHigh)

question

downward shift in consumption

answer

the other source of private domestic spending

question

investment

answer

if r% (real rate of return) > i% (real rate if interest)

question

make the investment

answer

if r% < i%

question

do not make the investment

answer

i = r

question

rational investment

answer

(assuming that investment spending (I) is determined from the investment demand curve and is constant at all levels of GDP)

question

investment demand curve

answer

a horizontal line with GDP on the x-axis and investment on the y-axis

question

autonomous invesment

answer

the relationship between saving and investment

question

market for loanable funds

answer

the inverse relationship (negative correlation) between investment and the real interest rate.

(interest falls, borrowing becomes less costly, and there is an increase in investment)

question

demand for loanable funds (investment demand curve)

answer

the positive relationship between the savings on households (both domestic and foreign) and the real interest rate; comes from saving and lending

question

supply of loanable funds

answer

y-axis: real interest rate

x-axis: loanable funds ($)

intersection of demand and supply curve: equilibrium interest rate

question

market for loanable funds graph

answer

the real interest rate where dollars saved equals dollars invested

question

equilibrium

answer

a change in any component of autonomous spending creates a large change in GDP

question

multiplier effect

answer

= 1/(1-MPC)

question

spending multiplier (when MPC is given)

answer

= 1/MPS

question

spending multiplier (when MPS is given)

answer

government spending (G); net exports (X-M)

question

public and foreign sectors

answer

when the government injects money into the economy, it multiplies by the spending multiplier to get the money added in new GDP

question

government spending (G)

answer

when the government injects money into the economy, it multiplies by the spending multiplier to get the money added in new GDP

question

net exports (X-M)

answer

increase MPC and MPS

question

decrease in taxes

answer

- MPC/MPS

- MPC/(1-MPC)

question

the multiplier effect in taxes

answer

- spending multiplier works as soon as there is a change in autonomous spending (C,G,I,(X-M))

- tax multiplier must first go through a person's consumption function as disposable income

question

tax multiplier (Tm)

answer

- the factor by which a change in both spending and taxes changes real GDP by the government

- is always equal to 1

question

difference in multipliers

answer

more spending

question

balanced budget multiplier

answer

less spending

question

increase in income

answer

undefined

question

increase in taxes

answer

undefined

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chapter 8 – consumption, saving, investment, and the multiplier

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