Macroeconomics - Ch 10

Question 1

45 degree line

Answer 1

reference line; C = DI; vertical distance between the 45 degree line and any point on the horizontal axis measures either consumption or disposable income

Question 2

Consumption schedule/function

Answer 2

reflects the direct consumption - disposable income relationship

Question 3

Saving schedule/function

Answer 3

saving = disposable income (DI) - consumption (C)

Question 4

break-even income

Answer 4

income level at which households plan to consume their entire incomes (C = DI)

Question 5

Average Propensity to Consume (APC)

Answer 5

fraction (%) of total income that is consumed; consumption divided by income

Question 6

Average Propensity to Save (APS)

Answer 6

fraction of total income that is saved; saving divided by income

Question 7

Marginal Propensity to Consume (MPC)

Answer 7

proportion/fraction of any change in income consumed; change in consumption divided by change in income

Question 8

Marginal Propensity to Save (MPS)

Answer 8

fraction of any change in income saved; change in saving divided by change in income

Question 9

wealth effect

Answer 9

households tend to increase their spending and reduce their saving; shifts the consumption schedule upward and the saving schedule downward

Question 10

Paradox of thrift

Answer 10

possibility that a recession can be made worse when households become more thrifty and save in response to the downturn

Question 11

Expected rate of return

Answer 11

expected profit as a percentage

Question 12

Investment demand curve

Answer 12

amount of investment forthcoming at each real interest rate

Question 13

Multiplier

Answer 13

a change in a component of total spending leads to a larger change in GDP; multiplier determines how much larger that change will be (ratio of a change in GDP to the initial change in spending);