Chapter 27 Basic Macroeconomic Relationships
QUESTIONS
1. What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago? LO1
Answer: (a) Consumption schedule: The variable on the vertical axis (y-axis) is consumption and the variable on the horizontal axis (x-axis) is disposable income (see Figure 27.2a).
These variables are directly (positively) related because they move in the same direction.
(b) Saving schedule: The variable on the vertical axis (y-axis) is saving and the variable on the horizontal axis (x-axis) is disposable income (see Figure 27.2b).
These variables are directly (positively) related because they move in the same direction.
The level of consumption and saving in the United States is higher today than a decade ago because real GDP and income are higher.
2. Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of MPC and the MPS equal 1? LO1
Answer: MPC refers to changes in spending and income at the margin. Here we compare a change in consumer spending to a change in income: MPC = change in C / change in Y. APC is an average whereby total spending on consumption (C) is compared to total income (Y): APC = C/Y.
When your income changes there are only two possible options regarding what to do with it: You either spend it or you save it. MPC is the fraction of the change in income spent; therefore, the fraction not spent must be saved and this is the MPS. The change in the dollars spent or saved will appear in the numerator and together they must add to the total change in income. Since the denominator is the total change in income, the sum of the MPC and MPS is one....