Sean Faria (sean.faria001) Chapter 8 assignment 1. a.

The consumption schedule or curve shows how much households plan to consume at various levels of disposable income at a specific point in time. b. The saving schedule or curve shows how much households plan to save at various levels of disposable income at a specific point in time. c. The investment demand curve shows how much will be invested at all possible interest rates, given the expected rate of net profit from the proposed investments. d. The multiplier effect shows how an initial change in spending can flow through the system to generate a larger change in GDP. 2. a. If each household has become richer, then consumption will increase at each income level. b. The decline in the real interest rate will increase interest-sensitive consumer spending c. A razor-sharp decline in stock value can be expected to decrease consumer spending because of the decrease in wealth d. The increase in the rate of population growth will, over time, increase the rate of income growth. e. This innovation will shift the investment schedule upward. f. The postponement of benefits may cause households to save more if they planned to retire before they qualify for benefits.

g. The consumption schedule will shift upwards and the saving schedule downwards until people has stocked up enough. h. Consumption will decline in proportion to the marginal propensity to consume as a result this reduces disposable income. 3. a. The multiplier effect describes how an initial change in spending ripples through the economy to generate a larger change in real GDP. b. The MPC is directly (positively) related to the size of the multiplier. c. The MPS is inversely (negatively) related to the size of the multiplier. d. The multiplier values for the MPS values: undefined, 2.5, 1.67, and 0. e. The multiplier values for the MPC values: undefined, 10, 3 (approx. actually 3.03), 2, 0. f. If MPC is .80, change in GDP is $40 billion (5 x $8 = $40)

g. If MPC is .67, change in GDP is $24 billion (approximately) (3 x $8 = $24)

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