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.

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household...

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy’s multiplier is 3 a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially...

Suppose consumers' disposable income increased by $341 billion and their spending increased by $299 billion. What...

Suppose consumers' disposable income increased by $341 billion and their spending increased by $299 billion. What was the MPC? Suppose the government increases education spending by $30 billion. If the marginal propensity to consume is 0.90, how much will total spending increase?

For example: Question: If income changes by $40 billion for each $2.28 billion change in spending,...

For example: Question: If income changes by $40 billion for each $2.28 billion change in spending, h much will income change by? Answer: 91 (rounded down from the calculated value of $91.2 billion) [Not acceptable would be: 91.2, nor $91, nor $91.2, et al.] For the following five questions, assume the following characteristics of the monetary transmission mechanism: The money multiplier is 2.33 Interest rates will change by 2.25% for every $75 billion change in the money supply. Investment will...

Investment in 2017 rises by 100 (all figures are in billion dollars). GDP in 2017 does...

Investment in 2017 rises by 100 (all figures are in billion dollars). GDP in 2017 does not change. Also, Consumption (C) and Government purchases (G) do not change. Which is most likely to happen? GDP in 2018 will rise by 100. Capital in 2018 will rise by 100. Capital in 2017 will rise by 100. Net exports in 2017 will rise by 100. The real wage will rise in 2017.

Government spending in Robok is $200 billion, and its only tax is an income tax with...

Government spending in Robok is $200 billion, and its only tax is an income tax with a marginal tax rate of 0.4. a. The balance on the government’s budget at a GDP level of $380 billion is a (Click to select) deficit surplus of $ billion. b. The balance on the government’s budget at a GDP level of $580 billion is a (Click to select) deficit surplus of $ billion. c. At what level of GDP will the economy of Robok have a balanced budget? Robok will have a balanced...

1. Consider a consumer with 100 units of income that can be expended in books (...

1. Consider a consumer with 100 units of income that can be expended in books ( good 1) and other goods ( good 2). The prices of these goods are: p(1) = 1, and p(2) = 2. (i) Write down - and make a picture- of the budget constrain of the consumer, and its budget set. ¿What is the economic interpretation of the slope of the budget constrain?. (ii) Do the same as before when the income of the consumer...

Question: What are the main influences on the elasticity of demand that that makes the demand...

Question: What are the main influences on the elasticity of demand that that makes the demand for some goods elastic and demand for another goods inelastic? What are the main influences on the elasticity of supply that make the supply of goods elastic and the supply of other goods inelastic? Chapter 5

Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8

Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8, private investment spending of 160 billion dollars, government spending of 140 billion dollars, a balanced budget, and balanced trade (i.e. exports and imports are equal). Write a short essay comparing the effects (1) on the government budget and (2) on the equilibrium level of income in the economy of (i) a 5 billion dollar increase in government spending and...

Assume the government increases spending by $100. Explain: (1) through the multiplier process, why income Y...

Assume the government increases spending by $100. Explain: (1) through the multiplier process, why income Y will increase; and (2) why the money market (LM Curve) cause investment to fall and thus the increase in GDP to be less than hoped for. I NEED MATH AND GRAPHs please!

Consumer spending is linked to disposable income. In 2011 and 2012, President Obama lowered the payroll...

Consumer spending is linked to disposable income. In 2011 and 2012, President Obama lowered the payroll taxes paid by workers from 6.2% to 4.2%. Explain how this change in taxes affected consumption and aggregate demand.

Subjects