Reading/Study Guide - Chapter 27 – Basic Macroeconomic Relationships

After reading this chapter, you should be able to:

1. Define disposable income.

2. What does “C” represent for a household?

3. What does “S” represent for a household?

4. What is dissaving.

5. Define MPS and write the formula:

6. True or False. MPC + MPS = 1

7. What is one possible reason why a consumption and savings schedule might shift?.

8. What is the interest rate-investment relationship?

9. If the real interest rate is 8% and the rate of return is 10% would a firm make the decision to invest?

10. If the real interest rate is 8% and the rate of return is 6.5% would a firm make the decision to invest?

11. What is one possible reason why an investment demand schedule might shift?

12. Can the government force firms and private individuals to invest?

13. What is the multiplier effect on the macro economy?

14. Write the multiplier formula from page 556:

15. Show your work. What is the spending, or expenditures, multiplier when the:

MPC = .9

MPC = .75

MPS = .25

MPS = .5

16. Why does the actual multiplier differ from the simple theoretical examples?