Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 27

Basic Macroeconomic Relationships - all with Video Answers

Educators

Chapter Questions

Problem 1

Very briefly summarize the relationships shown by $(a)$ the consumption schedule, $(b)$ the saving schedule, $(c)$ the investment demand curve, and $(d)$ the multiplier effect. Which of these relationships are direct (positive) relationships and which are inverse (negative) relationships? Why are consumption and saving in the United States greater today than they were a decade ago?

Mihir Nayar

Mihir Nayar

Numerade Educator

Problem 2

Precisely how do the APC and the MPC differ? Why must the sum of the MPC and the MPS equal 1 ? What are the basic determinants of the consumption and saving schedules? Of your personal level of consumption?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 3

Explain how each of the following will affect the consumption and saving schedules (as they relate to GDP) or the investment schedule, other things equal:
a. A large increase in the value of real estate, including private houses.
b. A decline in the real interest rate.
c. A sharp, sustained decline in stock prices.
d. An increase in the rate of population growth.
e. The development of a cheaper method of manufacturing computer chips.
f. A sizable increase in the retirement age for collecting Social Security benefits.
g. An increase in the Federal personal income tax.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 4

Explain why an upward shift of the consumption schedule typically involves an equal downshift of the saving schedule. What is the exception to this relationship?

Mihir Nayar

Numerade Educator

Problem 5

Complete the following table:
a. Show the consumption and saving schedules graphically.
b. Find the break-even level of income. Explain how it is possible for households to dissave at very low income levels.
c. If the proportion of total income consumed (APC) decreases and the proportion saved (APS) increases as income rises, explain both verbally and graphically how the MPC and MPS can be constant at various levels of income.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 6

What are the basic determinants of investment? Explain the relationship between the real interest rate and the level of investment. Why is investment spending unstable? How is it possible for investment spending to increase even in a period in which the real interest rate rises?

Xiaomin Bian

Numerade Educator

Problem 7

Suppose a handbill publisher can buy a new duplicating machine for $500$ and the duplicator has a 1 -year life. The machine is expected to contribute $\$ 550$ to the year's net revenue. What is the expected rate of return? If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Explain.

Mihir Nayar

Numerade Educator

Problem 8

Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10$ billion of investment projects yielding expected returns of between 20 and 25 percent; another $10$ billion yielding between 15 and 20 percent; another $10$ billion between 10 and 15 percent; and so forth. Cumulate these data and present them graphically, putting the expected rate of return on the vertical axis and the amount of investment on the horizontal axis. What will be the equilibrium level of aggregate investment if the real interest rate is
(a) 15 percent, $(b)$ 10 percent, and ( $c$ ) 5 percent? Explain why this curve is the investment demand curve.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 9

What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0 ,
$.4, .6,$ and $1 ?$ What will it be when the $\mathrm{MPC}$ is 1, .90, .67
$.50,$ and $0 ?$ How much of a change in GDP will result if firms increase their level of investment by $8$ billion and the MPC is $.80 ?$ If the MPC is .67?

Mihir Nayar

Numerade Educator

Problem 10

Why is the actual multiplier for the U.S. economy less than the multiplier in this chapter's simple examples?

Mihir Nayar

Numerade Educator

Problem 11

and $S=-a+(1-b) Y,$ where $C, S,$ and $Y$ are consumption, saving, and national income, respectively. The constant $a$ represents the vertical intercept, and $b$ represents the slope of the consumption schedule. (FIGURE CAN'T COPY)
a. Use the following data to substitute numerical values for $a$ and $b$ in the consumption and saving equations.
c. Suppose that the amount of saving that occurs at each level of national income falls by $ 20$ but that the values of $b$ and $(1-b)$ remain unchanged. Restate the saving and consumption equations for the new numerical values, and cite a factor that might have caused the change.
b. What is the economic meaning of $b$ ? Of $(1-b) ?$Linear equations for the consumption and saving schedules take the general form $C=a+b Y$

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 12

Suppose that the linear equation for consumption in a hypothetical economy is $C=40+$ $.8 Y .$ Also suppose that income $(Y)$ is 400 .$ Determine (a)$ the marginal propensity to consume, $(b)$ the marginal propensity to save, $(c)$ the level of consumption, $(d)$ the average propensity to consume, $(e)$ the level of saving, and $(f)$ the average propensity to save.

Mihir Nayar

Numerade Educator

Problem 13

What is the central economic idea humorously illustrated in Art Buchwald's piece, "Squaring the Economic Circle"? How does the central idea relate to recessions, on the one hand, and vigorous expansions, on the other?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator