Macroeconomics - Chapter 10

The level of income is the most important determinant of consumption and saving because it directly affects individuals' purchasing power and ability to save. When income increases, people generally have more disposable income, which leads to higher consumption levels. On the other hand, when income decreases, individuals tend to save more as they have less money available for spending. Therefore, the level of income plays a crucial role in determining consumption and saving patterns.

The level of income is the most important determinant of consumer spending because it directly impacts a household's ability to purchase goods and services. When income levels are higher, consumers have more disposable income to spend, leading to increased consumer spending. Conversely, when income levels are lower, consumers have less money available to spend, resulting in decreased consumer spending. The level of income also influences consumer borrowing and saving patterns, further affecting consumer spending behavior.

The size of the MPC (Marginal Propensity to Consume) refers to the proportion of an additional income that individuals choose to spend rather than save. It represents the increase in consumer spending resulting from an increase in income. If the size of the MPC is assumed to be greater than zero but less than one, it means that individuals tend to spend a portion of their additional income and save the rest. This assumption suggests that not all additional income is immediately consumed, allowing for some savings and investment in the economy.

A decrease in disposable income will cause a movement down along an economy's consumption schedule because when disposable income decreases, individuals have less money available to spend on goods and services. This leads to a decrease in consumption as people are less able to afford purchases, causing a downward shift in the consumption schedule.

The consumption schedule directly relates the level of consumption to the level of disposable income. This means that as disposable income increases, consumption also increases. It implies that individuals tend to spend more when they have more disposable income available. This relationship is important in understanding how changes in income can affect consumption patterns and overall economic activity.

The marginal propensity to consume (MPC) is the proportion of an increase in income that is spent on consumption. The marginal propensity to save (MPS) is the proportion of an increase in income that is saved. Since the two are complementary, the sum of MPC and MPS is always equal to 1. Therefore, if the marginal propensity to save is 0.4, the marginal propensity to consume would be 1.0 minus 0.4, which is 0.6.

Dissaving refers to the situation where households are spending more than their current incomes. This means that they are using up their savings or borrowing money to cover their expenses. It is the opposite of saving, where households are setting aside a portion of their income for future use. Disinvesting, on the other hand, refers to the act of selling or liquidating investments. While dissaving may lead to disinvestment if households need to sell assets to cover their expenses, the two terms are not synonymous.

Consumption exceeds income refers to a situation where an individual or a household is spending more money on goods and services than they are earning. This can lead to dissaving, which means that individuals are either using their savings or taking on debt to finance their consumption. Dissaving can occur when individuals have a negative savings rate or when they are spending more than their income, resulting in a decrease in their overall wealth.

The correct answer is a direct relationship between aggregate consumption and aggregate income. This means that as aggregate income increases, aggregate consumption also increases. This is because individuals have more disposable income to spend on goods and services. Conversely, if aggregate income decreases, aggregate consumption will also decrease as individuals have less money to spend. This relationship is important in understanding how changes in income levels can impact overall consumption patterns in an economy.

The MPC (Marginal Propensity to Consume) represents the change in consumption for a given change in disposable income. In this case, the consumption schedule shows that consumption increases by 0.9 for every 1 unit increase in disposable income. This indicates a high MPC of 0.9, meaning that individuals are likely to spend a large portion of any additional income they receive.

The equation for the consumption schedule is C= 20 + .6Y, where C is consumption and Y is disposable income. The vertical intercept represents the value of consumption when disposable income is zero, which is 20 in this case. The slope represents the change in consumption for a unit change in disposable income, which is 0.6 in this case. Therefore, the vertical intercept would be +20 and the slope would be +.6.

The consumption schedule shows the amounts households intend to consume at various possible levels of aggregate income. This means that it provides information about how much households plan to spend on consumption at different levels of overall income in the economy. It does not indicate that the MPC increases in proportion to GDP, that households consume more when interest rates are low, or that consumption depends primarily on the level of business investment.

The correct answer is that a direct and relatively stable relationship exists between consumption and income. This means that as disposable income increases, consumption also tends to increase, but at a relatively stable rate. In other words, people generally spend a larger proportion of their income when they have more money available, but the increase in consumption is not as volatile or drastic as in the second option. The relationship is not equal (as stated in the fourth option) because people typically save a portion of their income rather than spending it all.

The MPC (Marginal Propensity to Consume) for an economy refers to the change in consumption that occurs due to a change in income. It represents the slope of the consumption schedule or line, indicating how much consumption increases for every unit increase in income. A higher MPC means a larger proportion of additional income is spent on consumption, while a lower MPC means a smaller proportion is spent. Therefore, the correct answer is "the slope of the consumption schedule or line".

The given answer states that the marginal propensity to consume (MPC) is greater in A than in B. This means that individuals in A are more likely to spend a larger proportion of their additional income compared to individuals in B. This could be due to various factors such as differences in income distribution, consumer behavior, or government policies. However, without further information, it is difficult to determine the exact reason for this difference in MPC between A and B.

The consumption schedule equation given is C= 20 + .9Y, where C is consumption and Y is disposable income. To find the level of saving, we need to subtract the consumption from the disposable income. At a $800 level of disposable income, the consumption would be C= 20 + .9(800) = 20 + 720 = $740. Therefore, the level of saving would be $800 - $740 = $60.

The equation for the consumption schedule, C = 35 + 0.75Y, indicates that households will consume $35 if their disposable income is zero. Additionally, they will consume three fourths (0.75) of any increase in disposable income they receive. This means that as disposable income increases, consumption will also increase, but at a slower rate. Therefore, the correct answer is that households will consume $35 if their disposable income is zero and will consume three fourths of any increase in disposable income they receive.

The correct answer is "change in income that is spent". This means that the MPC (Marginal Propensity to Consume) represents the proportion of an increase in income that individuals choose to spend rather than save or invest. It indicates the responsiveness of consumption to changes in income.

The correct answer is "specific level of total income that is consumed". This means that the APC (Average Propensity to Consume) represents the proportion of total income that is spent or consumed at a specific level of income. It indicates how much of a person's income is used for consumption rather than saving or investing.

The correct answer is "MPC plus MPS equals APC plus APS." This equation represents the relationship between Marginal Propensity to Consume (MPC), Marginal Propensity to Save (MPS), Average Propensity to Consume (APC), and Average Propensity to Save (APS). MPC is the proportion of additional income that is spent, MPS is the proportion that is saved, APC is the average amount of income spent, and APS is the average amount saved. The equation shows that the sum of the proportions spent and saved is equal to the average amounts spent and saved.

The correct answer is APC plus APS equals one. This equation represents the concept of aggregate expenditure in macroeconomics. APC (Average Propensity to Consume) is the proportion of income that is consumed, while APS (Average Propensity to Save) is the proportion of income that is saved. According to the theory, APC and APS combined should equal one, as all income is either consumed or saved.

The correct answer is "relatively stable" because consumption refers to the spending on goods and services by individuals and households. Unlike investments, which can vary greatly depending on economic conditions and individual preferences, consumption tends to be more consistent and predictable over time. People generally have stable patterns of spending on essential items like food, housing, and healthcare, which contribute to the relative stability of consumption.

If Trent's MPC is .80, this means that he will spend 8/10 or 80% of any increase in his disposable income. This indicates that Trent is likely to have a high propensity to consume, meaning that he is more inclined to spend a larger portion of his additional income rather than saving it.

The given equation, MPS = MPC + 1, is not correct because it implies that the marginal propensity to save (MPS) is equal to the marginal propensity to consume (MPC) plus 1, which is not accurate. The correct relationship between MPS and MPC is that they sum up to 1, indicating that any increase in income is either consumed or saved.

The given answer states that the marginal propensity to consume (MPC) is greater than zero but less than one. This means that for every additional unit of income, individuals consume a portion of it but also save a portion of it. This indicates that consumption increases with income, but not as much as the increase in income itself. It suggests that individuals tend to save a significant portion of their income rather than spending it all.

If Carol's disposable income increases from $1200 to $1700 and her level of saving increases from minus $100 to a plus $100, it means that her consumption also increases. The question states that the marginal propensity to save is 3/5, which means that for every additional dollar of income, Carol saves 3/5 of it. Therefore, the remaining 2/5 of the income is consumed. Since her consumption increases along with her income, it can be concluded that her consumption is 3/5.

The average propensity to consume is calculated by dividing consumption (C) by disposable income (Y). In this case, the equation for the consumption schedule is C = 20 + 0.8Y. To find the average propensity to consume, we need to substitute the given values for consumption and disposable income. When disposable income is $100, the consumption will be C = 20 + 0.8(100) = 20 + 80 = $100. Therefore, the average propensity to consume is 1.

The MPC (Marginal Propensity to Consume) represents the proportion of additional income that a person will spend rather than save. In this case, Tessa's MPC is 0.75, which means that for every additional dollar of disposable income, she will spend $0.75 and save $0.25.

Her actual disposable income is $16,000, and her breakeven income is $10,000. The difference between these two incomes is $6,000. Since her MPC is 0.75, she will spend 0.75 * $6,000 = $4,500 of this additional income.

Therefore, her consumption spending will be her breakeven income plus the additional spending, which is $10,000 + $4,500 = $14,500.

The correct answer is "consumption/income". This is because the APC (Average Propensity to Consume) is calculated by dividing the change in consumption by the change in income. It represents the proportion of income that is spent on consumption.

If a family's consumption exceeds its disposable income, it means that they are spending more than they earn. Average Propensity to Consume (APC) is calculated by dividing consumption by disposable income. If APC is greater than 1, it indicates that the family is spending more than their income, which aligns with the given scenario.

The 45° line on a graph relating consumption and income shows all the points at which consumption and income are equal. This means that at any given point on the line, the amount of consumption and income are the same. It represents a situation where households are spending all of their income, resulting in no savings.

The answer suggests that consumers will maximize their satisfaction where the consumption schedule and 45° line intersect. This means that initially, consumption may exceed income, indicating that consumers are spending more than they earn. However, after a certain point, consumption falls below income, indicating that consumers are saving more than they spend. The answer also mentions that the MPC (Marginal Propensity to Consume) falls as income increases, implying that as income rises, consumers tend to save a larger proportion of their income rather than spending it all. Overall, the answer highlights the relationship between consumption, income, and savings for consumers.

As disposable income increases, individuals have more money available to spend on goods and services. This leads to an increase in consumption as people are able to afford more products. Additionally, with higher disposable income, individuals may also choose to save a portion of their income for future use, leading to an increase in saving. Therefore, both consumption and saving increase as disposable income increases.

A decline in disposable income leads to a decrease in consumption by moving downward along a specific consumption schedule. This means that as disposable income decreases, individuals have less money available to spend on goods and services, causing them to consume less. This downward movement along the consumption schedule indicates a decrease in the quantity of goods and services consumed at each level of income.

The correct answer is "increase absolutely but decline as a percentage of income". This means that as income increases, consumption will increase in absolute terms, but the percentage of income spent on consumption will decrease. This suggests that as people earn more money, they tend to save a larger portion of their income rather than spending it all.

As disposable income increases, people tend to save a larger portion of their income rather than spend it. This means that the average propensity to consume, which measures the proportion of income that is spent, decreases. Therefore, the correct answer is that the average propensity to consume falls.

As income rises, if the APC (Average Propensity to Consume) declines, it means that the proportion of income spent on consumption decreases. This implies that as income increases, people tend to save more and consume less. On the other hand, if the MPC (Marginal Propensity to Consume) is constant, it means that for each additional unit of income, the same proportion is spent on consumption. This suggests that people's spending habits remain consistent regardless of their income level. Therefore, the given answer states that the MPC is constant and the APC declines as income rises.

The given answer states that the APC (Average Propensity to Consume) is 1. This means that individuals are spending all of their disposable income, indicating that their consumption is equal to their income. When the consumption schedule intersects the 45° line, it signifies that the economy is in equilibrium, as there is no tendency for income or consumption to change. In this scenario, savings would be equal to zero, as individuals are not saving any portion of their income.

The correct answer is "multiplying total income by the APC". The APC, or average propensity to consume, represents the proportion of total income that is consumed. By multiplying total income by the APC, one can determine the amount of any level of total income that is consumed.

The correct answer is that consumption and saving cannot be determined from the information given. The reason for this is that the MPC (marginal propensity to consume) and disposable income are not enough to determine the exact levels of consumption and saving. The MPC only tells us the proportion of additional income that will be spent on consumption, but it does not provide information about the initial level of consumption or the total income. Therefore, we cannot determine the specific amounts of consumption and saving based on the given information.