Macro Econ Final Review-quiz

The Marginal Propensity to Save (MPS) refers to the fraction or proportion of any change in income that is saved. It represents the portion of additional income that individuals choose to save rather than spend. MPS is calculated by dividing the change in savings by the change in income. It helps economists understand how changes in income affect saving behavior and overall economic activity.

The correct answer is MPS= change in savings/ change in income. This formula calculates the Marginal Propensity to Save (MPS) by dividing the change in savings by the change in income. This ratio helps determine the proportion of additional income that individuals save rather than spend.

The correct answer is APS= savings/ income. This formula calculates the average propensity to save (APS) by dividing the amount of savings by the total income. APS represents the proportion of income that an individual or a household saves rather than spends. By calculating APS, one can determine the saving behavior and financial stability of an individual or a group.

The correct answer is MPC= change in consumption/ change in income. This formula calculates the Marginal Propensity to Consume, which represents the change in consumption resulting from a change in income. By dividing the change in consumption by the change in income, we can determine how much of an increase or decrease in income will be spent on consumption. This helps to understand the relationship between income and consumption and how it affects the overall economy.

The Average Propensity to Save (APS) refers to the fraction or percentage of income that is saved. It indicates the proportion of income that individuals or households choose to save rather than consume. APS is calculated by dividing the amount of savings by the total income. This measure helps in understanding the saving behavior of individuals and the overall saving patterns in an economy.

When interest rates decline, it becomes cheaper to borrow money. This lowers the cost of borrowing for individuals and businesses, making it more attractive to take out loans to finance consumption or investment. As a result, there is an increased incentive to borrow and consume. On the other hand, lower interest rates also reduce the returns on savings accounts and other interest-bearing investments. This reduces the incentive to save as the potential gains from saving are diminished. Therefore, the correct answer is that when interest rates decline, it increases the incentive to borrow and consume and reduces the incentive to save.

The real interest rate is a measure that determines the cost of investment. It represents either the cost of borrowed funds or the opportunity cost of investing your own funds. In other words, it is the cost that an individual or a business has to pay in order to borrow money for investment purposes or the potential return they would have earned if they had chosen to invest their own funds elsewhere. By comparing the expected economic profit, one can calculate the real interest rate.

The correct answer is APC= consumption/ income. The Average Propensity to Consume (APC) is calculated by dividing the total consumption by the total income. This ratio helps determine the proportion of income that is spent on consumption. By dividing consumption by income, we can understand how much of the income is being used for consumption purposes.

The Marginal Propensity to Consume (MPC) refers to the fraction or proportion of any change in income that is consumed. This means that if there is an increase in income, the MPC indicates how much of that increase will be spent on consumption. For example, if the MPC is 0.8, it means that for every additional dollar of income, 80 cents will be spent on consumption.

Lower debt levels can shift the consumption schedule up because individuals have more disposable income available to spend on goods and services. This increased consumption leads to a higher level of overall spending in the economy. On the other hand, lower debt levels can also shift the saving schedule down because individuals may feel less compelled to save as much of their income. With lower debt, individuals have more confidence in their financial situation and may choose to spend a larger portion of their income rather than saving it.

The Average Propensity to Consume (APC) refers to the fraction or percentage of income that is consumed. It represents the proportion of any change in income that individuals or households choose to spend rather than save. It is a measure of how much of their income people typically use for consumption purposes.

The correct answer is "determines how large the change between changes in spending and changes in real GDP will be." This explanation is supported by the definition of a multiplier, which measures the impact of changes in spending on changes in real GDP. The multiplier determines the magnitude of this impact, indicating how much the changes in spending will affect the overall change in real GDP.

Investment is a very unstable type of spending because it tends to fluctuate more than GDP. Unlike government spending or consumer spending, which are relatively stable, investment is influenced by various factors such as interest rates, business confidence, and market conditions. These factors can cause investment levels to rise or fall rapidly, leading to volatility in the economy. Therefore, investment is considered to be an unstable component of spending compared to the more steady GDP.

The expected rate of return represents the marginal benefit and the interest rate, which is the cost of borrowing funds. This means that when making an investment, the expected rate of return takes into account the potential benefits and the cost of borrowing money to make the investment. It represents the marginal cost because it considers the additional cost incurred by borrowing funds to invest.

The non-income determinants of consumption are factors that influence consumption levels but are not directly related to income. Wealth is one such determinant as individuals with higher wealth tend to have higher levels of consumption. Expectations also play a role, as individuals may adjust their consumption based on their expectations of future income or economic conditions. Real interest rates can affect consumption by influencing borrowing costs and the opportunity cost of saving. Household debt can impact consumption as individuals with high levels of debt may have less disposable income available for consumption. Finally, taxation can affect consumption by reducing disposable income.

The correct answer is r= TR(total revenue) - TC (total cost) / investment. This formula calculates the expected rate of return by subtracting the total cost from the total revenue and dividing it by the investment. This formula takes into account the profitability of the investment by considering the revenue generated and the costs incurred.

When wealth increases, individuals tend to spend more on consumption goods and services, leading to an upward shift in the consumption schedule. At the same time, since individuals are spending more, their savings tend to decrease, resulting in a downward shift in the savings schedule. Therefore, the correct answer is that the consumption schedule will shift up and savings will shift down.

Lower taxes will shift both the consumption schedule and the savings schedule up because when taxes are lower, individuals have more disposable income available for both spending and saving. This means that people are likely to increase their consumption and savings, leading to an upward shift in both schedules. Conversely, higher taxes would have the opposite effect, shifting both schedules down as individuals have less disposable income for spending and saving.

The correct answer is "All the above" because all three equations mentioned in the options are valid ways to calculate the multiplier. The first equation calculates the multiplier by dividing 1 by the marginal propensity to save (MPS). The second equation calculates the multiplier by dividing the change in real GDP by the initial change in spending. The third equation calculates the multiplier by dividing 1 by the marginal propensity to consume (MPC) subtracted from 1. Therefore, all three equations provide a valid calculation for the multiplier.