Chapter 10: Macroeconomic Policy (page 196)
What are the main macroeconomic objectives of a government?
Economic Growth, Low inflation, low unemployment, price stability and sustainable balance of payments.
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In year 1, Adam earns \(1,000 and saves \)100. In year 2, Adam gets a \(500 raise so that he earns a total of \)1,500. Out of that \(1,500, he saves \)200. What is Adam’s MPC out of his $500 raise?
0.50
0.75
0.80
1.00
Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + 0.8Y. Also, suppose that income (Y) is $400. Determine
the marginal propensity to consume,
the marginal propensity to save,
the level of consumption,
the average propensity to consume,
the level of saving, and
the average propensity to save.
Linear equations for the consumption and saving schedules take the general form C = a + bY 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.
a. Use the following data to substitute numerical values for a and b in the consumption and saving equations.
| National Income (Y) | Consumption (C) |
| \(0 | 80 |
| 100 | 140 |
| 200 | 200 |
| 300 | 260 |
| 400 | 320 |
b. What is the economic meaning of b? Of (1 − b)?
c. Suppose that the amount of saving that occurs at each level of national income falls by \)20 but that the values of b and (1 − b) remain unchanged. Restate the saving and consumption equations inserting the new numerical values, and cite a factor that might have caused the change.
Refer to the table in Figure 10.5 and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at each prospective level of investment. Assuming no change in the real interest rate, by how much and in what direction will investment change? Which of the following might cause this change: (a) a decision to increase inventories; (b) an increase in excess production capacity?
What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related, or are they directly (positively) related? What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?
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