Basic Macroeconomic Relationships

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CHAPTER 27
Basic Macroeconomic Relationships

A. Short-Answer, Essays, and Problems

1. What are the relationships among consumption, saving, and disposable income?

2. Define the consumption schedule.

3. Describe the saving schedule.

4. Explain how consumption and saving are related to disposable income in the aggregate expenditures model.

5. Fill in the table below. Describe your result.
Disposable Income
Consumption
Saving
$200
$210
$_____
$_____
$220
$0
$_____
$230
$10
$260
$_____
$20
$280
$_____
$30
$300
$260
$_____

6. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and all saving is personal saving.
Level of output and income

Consumption
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What would be the likely effect on household consumption and saving?

19. Other things being constant, what will be the effect of each of the following on disposable income (or GDP)?
(a) An increase in the amount of liquid assets consumers are holding
(b) A sharp rise in stock prices
(c) A rapid upsurge in the rate of technological advance
(d) A sharp increase in the interest rate

20. Other things being constant, what will be the effect of each of the following on consumption and saving schedules?
(a) Credit card companies increase the interest-free periods on their cards to compete for customers.
(b) Concern grows over rising prices.
(c) A weakening of the housing market lowers home values.
(d) Real interest rates fall.
(e) Congress officially approves the President’s plan for tax cuts.

21. Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.

22. Use the graphs below to answer the following questions:
(a) What types of schedules do graphs A and B represent?
(b) If in graph A line A2 shifts to A3 because households consume more and this change is not due to changing taxes, then in graph B, what would happen to line B2?
(c) If in graph B, line B2 shifts to B1 because households save less, then in graph A, what will happen to line A2?
(d) In graph A, what has caused the movement from point A to point B on line A2?
(e) If there is a lump-sum tax
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