Question

Refer to the information provided in Figure 8.1 below to answer the questions that follow.


Figure 8.1


1) Refer to Figure 8.1. The equation for this household's saving function is

Aggregate saving (billions of dollars) -500 1,000 Aggregate output, Y (billions of dollars)

a) S = -1,000 + 0.8Y.

b) S = -300 + 0.25Y.

c) S = -200 + 0.8Y.

d) S = -500 + 0.5Y.

Refer to the information provided in Figure 8.1 below to answer the questions that follow.


Figure 8.1


2) Refer to Figure 8.1. This household consumes $2,000 at an income level of

a) $2,275.

b) $2,000.

c) $1,840.

d) $3,000.

Refer to the information provided in Figure 8.2 below to answer the questions that follow.



Figure 8.2


3) Refer to Figure 8.2. Along the line segment AC, Jerry's

a) consumption is greater than his income.

b) saving is zero.

c) saving is positive.

d) consumption equals his income.

4) Lower interest rates are likely to

a) decrease both consumer spending and consumer saving.

b) decrease consumer spending and increase consumer saving.

c) increase consumer spending and decrease consumer saving.

d) have no effect on consumer spending or saving.

5) If consumption is $60,000 when income is $80,000, and consumption increases to $68,000 when income increases to $90,000, the MPC is

a) 0.4

b) 0.8

c) 0.2

d) 0.6

Answer 1

1. Ans - c) S = -500 + 0.5Y.

The equation for this household's saving function is S = -500 + 0.5Y.

Explanation:

MPS = change in saving / change in income

= 0 - (-500) / (1000 - 0 ) = 0.5

Saving function = - 500 + 0.5Y

2. Ans - d) $3000

Explanation:

Consumption function = a + MPC*Y = 500 + 0.5Y [MPC = 1-MPS = 0.5]

at 2000 consumption,

2000 = 500 + 0.5Y

1500 =0.5Y

Y = 3000

3. Ans - c) saving is positive

Because Income is more than consumption so saving is positive.

4. Ans - c) increase consumer spending and decrease consumer saving.

Explanation"
In this case, when the interest rate is low, it is best to consume now because if you saved your money, inflation outweights the benefits of saving and you actually lose money. In addition, if the interest rate were high, you save more because your money saved will be worth more in the future than now.

5. Ans - b) 0.8

Explanation:

MPC = Change in consumption / change in income

MPC = (68,000 - 60,000) / (90,000 - 80,000) =0.8