The most important determinant of a household's consumption spending is
Its disposable income
The difference between consumption spending and disposable income equals
Out of disposable income, households
Consume and save
If a household's disposable income is $1,200, and consumption is $960, savings equals
$240 (DI - C)
Sarah moves from Upperland, which has no taxes or transfer payments, to Lowerland, where she is hit with taxes of $2,000 and receives transfer payments of $3,000. She earns the same wage in both countries, but in Lowerland, her disposable income is
Induced saving is that portion of saving directly related to
A simple statement of the consumption behavior suggested in our model is that
People spend more and save more as disposable income increases
People tend to save ____ and spend ____ as their disposable incomes increase
The MPC is a relationship between
A change in consumption and a change in income (change in consumption divided by change in income)
A household's income raises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500. What is its MPC?
.75 (Change in consumption divided by change in income = 1,500/2,000)
Suppose when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the MPC?
.5 (.1 trillion/.2 trillion)
The marginal propensity to consume is the change in _____ related to a change in _____
Consumption, disposable income
If the MPC is equal to .70 and income rises by $20 billion, the consumption will rise by
$14 billion (.70*20 billion)
If every time disposable income increases by $5 billion, consumption increases by $4 billion and saving increases by $1 billion, the MPC and MPS are, respectively,
If income increases by $100 and $75 of the increase is spent (consumed), the MPS equals
What would NOT shift the consumption function?
Change in household disposable income
An increase in wealth will shift the consumption function
What would cause a decrease in consumption due to a decreased value of net wealth?
An increase in the price level
Expectations that the price level will decrease in the future will shift the current consumption function
According to the life-cycle model, proportionally, richer economies save a _______ fraction of disposable income as do poor countries
- Relatively similar
According to the life- cycle model, people ____ when they are young and _____ when they are older
A grocery store manager must decide whether to buy four rug cleaners to rent to customers. The manager estimates that the first would yield $200 a year, the second $150, the third $75, and the fourth $20. If the interest rate is 12%, and the rug cleaner costs $500, how many should the manager buy?
Three (because after the third one, the interest rate is more than the profit)
The owners of Morning Glory Coffee Shop are considering spending $3,000 on a new cappuccino machine. The expect revenues to increase by $200 per year if they do. The interest rate is 8%. Should they buy the machine?
No, because the interest per year would be $240, which exceeds the $200 profit.
A firm's level of investment is tied to the interest rate because investments are:
Always made with borrowed funds
The interest rate is important to the investment decision
Regardless of whether funds must be borrowed or firms have the funds on hand
New investment will be undertaken up to the point where the expected rate of return equals
The market interest rate
When economists say investment is autonomous, they mean that investment is independent of
the income level
Fluctuations in consumption are roughly similar to
fluctuations in GDP
Which is the most volatile component of GDP
A household's net wealth is the value of
Its assets minus its liabilities
As domestic income rises, net exports fall because
Exports remain the same but imports increase
As the U.S. price level increases, all other things equal, U.S. products become
More expensive abroad, which decreases U.S. exports
The largest category of gov't expenditures is
Direct benefit payments to individuals
A plan for gov't expenditures and revenues for the coming year is referred to as
The federal gov't budget
Which institution was created under the Employment Act of 1946 to assist the President in formulating appropriate fiscal policy
The Council of Economic Advisers
The beginning of the formal budget process is signified by
The President's submission to Congress of the Budget of the United States
What allows agencies to spend at the rate of the previous year in the absence of an approved budget
A continuing resolution
What is not a problem with the US federal budget process?
The lack of detail in the budget.
Problems with the federal gov't budget process include
Most of the expenditures are for entitlement programs
One proposal for improving the budget process is to
Switch to a two-year or biennial budget
If the gov't spent $20 million paying people to dig holes in 2005, then spent $30 million paying the same people to fill the holes up again that same year, we would expect the net effect to be a(n) ______ in the budget deficet, because ________
Increase, because gov't purchases of goods and services increased by $50 million
The federal budget deficit becomes ______ during recessions because ______
Larger, transfer payments increase and tax revenues decline
The accepted philosophy on US federal deficits prior to the Great Depression was that
The budget the budget should be annually balanced
John Maynard Keynes is best known for advocating
Deficit spending by the federal gov't during recessions
What effect could an annually balanced federal budget have on a contractionary gap?
It could worsen it
A disadvantage of having an annually balanced budget is that gov't spending would have to _____ in a recession to match _______
decrease; decrease in tax revenues
IF the gov't runs a cyclically balanced budget, its revenue will equal its expenditure
Over the course of the business cycle
A possible explanation for the persistence of the US federal budget deficits is that it is politically easier to increase _______ than to increase ______
Government spending, taxes
If aggregate output is increasing
Automatic stabilizers will tend to decrease the size of the deficit
The crowding in of private investment is associated with _____ business expectations resulting from an increase in _________ induced by increased ______
more favorable; aggregate demand; gov't borrowing
Increasing US trade deficits result in
Accumulation of dollars overseas
True or false: the rising value of the dollar leads to increased U.S exports and reduced imports. This is part of the sequence reflecting the impact on international markets on international markets of increased borrowing to finance large a gov't deficit.
What program redistributes taxes collected from current workers to provide pensions for current retirees?
What is expected to happen to the Social Security Trust fund between the years 2042 and 2052?
It will be empty
The national debt is a _____ variable measuring the net accumulation of past deficits
A biennial budget is a possible
The federal budget experienced surpluses from
1998-2001 (during Clinton administration)
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