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
4. Explain why it is important to identify the following when preparing a budget: [2.3]
18. If the production function for an economy had constant returns to scale, the labour force doubled, and all other inputs stayed the same, what would happen to real GDP?
c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Scenario 3: The nation is currently experiencing a period of rising prices. Inflation is making consumer goods increasingly difficult to afford as wages have remained constant.
33. Which of the following is not a problem associated with GDP as a measure of social
In the figure above, which graph represents what would happen if there was an increase in the price of metal used in the production of bicycles?
In Exhibit 2-19, the production possibilities curves for a country are shown for the years Year X and Year Y. Which of the following could have caused a shift for Year X to Year Y in production possibilities curves?
Pivot the budget line and derive two other points on the consumer’s demand for X.
11. Draw the consumption possibilities curve for each country on the same graph you drew for question 9.
1c. In the space below, explain the purpose of recording budgets in relation to both income and expenditure. Think about the advantages of doing this and the consequences of not doing this when you give your answer. Provide some examples to support your answer.
7. How might you use this three asset optimal-allocation model to construct and graph an
Estimate the effect on income each of the options Rowe has suggested if Bradley estimates as follows :
The depiction of growth is shown through a line chart between the two countries that is simply contrasting.