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In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal?

  1. A large decrease in real estate values, including private homes.
  2. A sharp, sustained increase in stock prices.
  3. A 5-year increase in the minimum age for collecting Social Security benefits.
  4. An economywide expectation that a recession is over and that a robust expansion will occur.
  5. A substantial increase in household borrowing to finance auto purchases.

Short Answer

Expert verified
  1. The consumption and saving schedule will shift to the left.
  2. The consumption and saving schedule will remain the same.
  3. The consumption and saving schedule will shift to the right.
  4. The consumption schedule will shift to the right, and the saving schedule will shift to the left.
  5. The consumption schedule will shift to the right, and the saving schedule will shift to the left.

Step by step solution

01

Explanation for part (a)

A large decrease in real estate values will decrease gross private investment. Income is private consumption, government purchases, gross investment, and net exports.

The declining investments will decrease the national income. Thus, the consumption and saving will decline, shifting the curves towards the left provided the MPC and MPS are constant.

02

Explanation for part (b)

Stock prices affect the financial market. A sustained, sharp increase in stock prices will increase stock demand. Therefore, the money demand for speculative purposes will increase. It will not affect the economy’s national income. Hence, the consumption and saving schedules will remain unchanged.

03

Explanation for part (c)

An extension of 5 years to the minimum age for social security benefits will include a larger population among the beneficiaries. It will add significantly to the national income.

Therefore, the economy’s consumption and saving will increase due to an increase in income, provided the MPC and MPS remain the same., and the consumption and saving schedule will shift right,

04

Explanation for part (d)

The expectation of expansion will stimulate investments in the economy, which will further accelerate the income generation in the economy. Thus, the national income will increase rapidly. Also, the future expectation for increasing the price level will force people to consume more. Hence, MPC will increase, and MPS will decrease.

Therefore, consumption will increase along with the declining saving. It will push the consumption schedule to the right (increase), while the saving schedule will shift to the left (decrease).

05

Explanation for part (e)

As the households finance the auto purchase, the auto sales will increase. Thus, private consumption will increase. On the other hand, the economy’s savings will decline as households consume more than their income. Therefore, the consumption schedule will shift to the right (increase), and the saving schedule to the left (decrease).

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Most popular questions from this chapter

Suppose that disposable income, consumption, and saving in some country are \(200 billion, \)150 billion, and \(50 billion, respectively. Next, assume that disposable income increases by \)20 billion, consumption rises by \(18 billion, and saving goes up by \)2 billion. What is the economy’s MPC? Its MPS? What was the APC before the increase in disposable income? After the increase?

How is it possible for investment spending to increase even in a period in which the real interest rate rises?

What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, 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 0.80? If the MPC instead is 0.67?

Use your completed table for problem 1 to solve this problem. Suppose the wealth effect is such that \(10 changes in wealth produce \)1 changes in consumption at each income level. If real estate prices tumble such that wealth declines by \(80, what will be the new level of consumption and saving at the \)340 billion level of disposable income? The new level of saving?

Level of Output and Income (GDP = DI)
Consumption
Saving
APC
APS
MPC
MPS
\(240
\)244
-$4
1.016
-0.016
0.8
0.2
2602600100.8
0.2
28027640.985
0.014
0.8
0.2
30029280.9730.0260.8
0.2
320308120.962
0.037
0.8
0.2
340324160.9520.0470.8
0.2
360340200.944
0.055
0.8
0.2
380356240.9360.0630.8
0.2
400372280.930.070.80.2

In what direction will each of the following occurrences shift the investment demand curve, other things equal?

  1. An increase in unused production capacity occurs.

  2. Business taxes decline.

  3. The cost of acquiring equipment falls.

  4. Widespread pessimism arises about future business conditions and sales revenues.

  5. A major new technological breakthrough creates prospects for a wide range of profitable new products.

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