1 What is the main variable that influences consumer spending? If income rises by $100 billion,...

1 What is the main variable that influences consumer spending? If income rises by $100 billion, causing consumption to increase by $85 billion, calculate the MPC (or marginal propensity to consume).

2 Besides an increase in income, what are two more major factors that could cause consumer spending to increase?

3 What are two major factors that could cause investment spending to increase?

4 What are two factors that could lead to an increase in the trade deficit? (Note that I want more than a change in exports and imports; I want factors that would cause these to change.)

5 Suppose that investment spending rises by $500 billion with an MPC of .75. Calculate the change in GDP.

6 Suppose that exports fall by $150 billion with an MPC of .7. Calculate the change in GDP.

Expert Solution

1 What is the main variable that influences consumer spending? Disposable income. When disposable income is increased, consumption is increased as well (by MPC times)

If income rises by $100 billion, causing consumption to increase by $85 billion, MPC = change in C/Change in Y = 85/100 = 0.85

2 Besides an increase in income, what are two more major factors that could cause consumer spending to increase? Reduction in the Interest rate and price level. These two variables will increase consumption.

3 What are two major factors that could cause investment spending to increase? Business optimism and future profitability. These allow the firms to invest more to earn higher returns.

4 What are two factors that could lead to an increase in the trade deficit? Reduction in foreign income which will reduce our exports and so net exports fall leading to trade deficit. Increase in domestic income increases imports and so net exports fall leading to trade deficit.

5 Suppose that investment spending rises by $500 billion with an MPC of .75. Then the change in GDP. = 500/1-0.75 = $2000 billion

6 Suppose that exports fall by $150 billion with an MPC of .7. Then the change in GDP = -150/1-0.7 = falls by 500 billion

Rahul Sunny answered 2 years ago

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