MacroEconomics - Chapter 10 - ProProfs Quiz
Another way of saying this is that total private savings (S) is equal to .. We define the consumption relationship at the most simple level as a. With gas prices skyrocketing, it pays to know the tricks to saving at the pump. Take our quiz to see how much you know about fuel efficiency. The most important determinant of consumption and saving is the. A. A direct relationship between aggregate consumption and accumulated.
What if one of these non-income determinants of consumption changes? Since they are not measured on either axis, we should note that a change in a non-income determinant of consumption will shift the entire consumption function not merely move you along a fixed consumption function. Wealth—In economics wealth and income are two separate variables. A simple example will illustrate the difference. The same could be said about sudden increases in the value of a piece of art that you own, the discovery of oil on your property, or increases in the value of your stock portfolio.
None of these occurrences increases your income, but they all increase your wealth. An increase in wealth will increase your consumption even at the same income level, and can be illustrated by an upward shift in both the Consumption Function and the Savings Function.
Obviously, a decrease in wealth will have the opposite effect. Expectations—There are times when consumers adjust their spending, based not on their actual income but rather on their expectations of future changes in their income. Changes in expectations will cause a shift in the curve, because consumption has changed without an actual chance in income. For example, if you think your income is going to go up in the future, you may consume more today.
Not that we suggest this as a wise course of action, but it has been observed that some college seniors start to spend more once they have secured a job, even though that job and its attendant income will not start for a month or two. This behavior would be illustrated by an upward shift in the consumption function showing that your consumption has increased even though your actual disposable income has not.
Likewise, if for some reason you were pessimistic about your future income rumors floating around the company that layoffs were eminent you might decrease your consumption, even though your actual current income had not changed.
Consumer Indebtedness—Consumers adjust their consumption to levels of indebtedness as well. We observe in the aggregate economy that when indebtedness goes up, consumption falls and savings rise. There is a level of debt beyond which consumers feel uncomfortable with additional spending. Even if income has stayed the same, if too much debt accumulates, consumers will start to spend less and pay off debt. This is illustrated by a downward shift in the Consumption Function and an upward shift in the Savings Function remember that paying off debt is the same thing as increasing savings.
The opposite is also true. Movement upward along the consumption function.
An upward shift in the consumption function. Movement downward along the consumption function. A downward shift in the consumption function.
QUIZ 1 (Draft 1)
Real disposable income, the consumption function. Interest rates, real disposable income. Interest rates, expectations of future business profit. Expectations of future business profit, real disposable income.
Which of the following will most likely cause an outward shift in a firm's investment demand? A decrease in interest rates. Low levels of existing capacity utilization. To overcome this uncertainty, economists devised what used to be called the Full Employment or High Employment Budget. In more recent times, this concept is now called the Structural Balance.
The Full Employment Budget Balance was a hypothetical construct of the budget balance that would be realised if the economy was operating at potential or full employment.
In other words, calibrating the budget position and the underlying budget parameters against some fixed point full capacity eliminated the cyclical component — the swings in activity around full employment. So a full employment budget would be balanced if total outlays and total revenue were equal when the economy was operating at total capacity.
Macroeconomics - Chapter 10
If the budget was in surplus at full capacity, then we would conclude that the discretionary structure of the budget was contractionary and vice versa if the budget was in deficit at full capacity.
The calculation of the structural deficit spawned a bit of an industry in the past with lots of complex issues relating to adjustments for inflation, terms of trade effects, changes in interest rates and more.
Much of the debate centred on how to compute the unobserved full employment point in the economy. There were a plethora of methods used in the period of true full employment in the s.
All of them had issues but like all empirical work — it was a dirty science — relying on assumptions and simplifications. As I explain in the blogs cited below, the measurement issues have a long history and current techniques and frameworks based on the concept of the Non- Accelerating Inflation Rate of Unemployment the NAIRU bias the resulting analysis such that actual discretionary positions which are contractionary are seen as being less so and expansionary positions are seen as being more expansionary.
The result is that modern depictions of the structural deficit systematically understate the degree of discretionary contraction coming from fiscal policy.
MIT - Principles of Macroeconomics - QUIZ 1 FALL 97
So the data provided by the question could indicate a more expansionary fiscal intent from government but it could also indicate a large automatic stabiliser cyclical component. Therefore the best answer is Maybe because there are circumstances where the proposition will not hold. You might like to read these blogs for further information: Structural deficits — the great con job!
When the government borrows from the private sector to match an increase in net public spending, the resulting increase in aggregate demand is less than would be the case if there was no bond sale.
The answer is false. The mainstream macroeconomic textbooks all have a chapter on fiscal policy and it is often written in the context of the so-called IS-LM model but not always. The writer fails to understand that government spending is performed in the same way irrespective of the accompanying monetary operations.
The textbook argument claims that money creation borrowing from central bank is inflationary while the latter private bond sales is less so. All these claims are without foundation in a fiat monetary system and an understanding of the banking operations that occur when governments spend and issue debt helps to show why. So what would happen if a sovereign, currency-issuing government with a flexible exchange rate ran a budget deficit without issuing debt?
Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank.Macroeconomics: Crash Course Economics #5
The commercial bank in question would be where the target of the spending had an account.