# Quiz 10: Basic Macroeconomic Relationships

a. Disposable income is divided into consumption and saving. The table is reproduced as follows: APC is average propensity to consume. Its formula is as follows: APS is the average propensity to save. Its formula is as follows: MPC is the marginal propensity to consume. Its formula is as follows: MPS is the marginal propensity to save. Its formula is as follows: The table is reproduced as follows: b. Break-even level of income is the income which equals to consumption. In this question the break-even level of income is $260. At the $240 level income consumption is higher than income and saving is negative. The economic term for this situation is dissaving. c. As income changes, MPS and MPC are constant, whereas APC and APS are variables. APC increases as income increases and APS decreases as income increases.

The variables in a graph of consumption schedule are disposable income and consumption level. The consumption level is on the vertical axes and the disposable income on the horizontal axes. The variables in a graph of saving schedule are disposable income and saving level. The saving level is on the vertical axes and the disposable income on the horizontal axes. The variables are positively related in both saving schedule and consumption schedule. The higher the income is, the higher the consumption and saving is. The fundamental reason for the increase of both consumption and saving is the increase of disposable income. The reason for the increase of disposable income is the increase of productivity and GDP.

MPC is the marginal propensity to consume. It measures the change in consumption caused by the change in income. MPS is the marginal propensity to save. Its formula is as follows: APC is average propensity to consume. Its formula is as follows: After the increase of income APC is calculated as follows:

_{1}to solve this problem. Suppose the wealth effect is such that $10 changes in wealth produce $1 changes in consumption at each level of income. If real estate prices tumble such that wealth declines by $80, what will be the new level of consumption at the $340 billion level of disposable income? The new level of saving?

_{1}1 percent?

_{2}7.5 in the book and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that 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?

_{1},.90,.67,.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is.80? If the MPC instead is.67?