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Chapter 12  Questions for homework

1. Begin by putting the appropriate formula in the first row below the unknowns,
and then calculate S, APC, APS, MPC, and MPS. Draw a graph for APC and APS.
(in trillions of dollars)
 Real DPI (Y) Consumption (C) Saving (S = Y - C) APC % (C/Y) APS % S/Y MPC % (C/Y) MPS  %S/Y 3 2.40 3-2.4 =.6 2.4/3 = 80% .6/3 = 20% 3.12-2.4    4-3 = 72% .75-3.12     5-4 = 63% 4.26-3.75      6-5 = 51% .88-.6   4-3  = 28% 1.25-.88 5-4 = 37% 1.74-1.25 6-5 = 49% 4 3.12 4-3.12 = .88 3.12/4 = 78% .88/4 = 22% 5 3.75 5-3.75 = 1.25 3.75/5 = 75% 1.25/5  =  25% 6 4.26 6-4.26 =   1.74 4.26/6 = 71% 1.74/6 = 29%

Note: APC + APS = 1 and MPC + MPS = 1 MPS = 1 - MPC MPC = C Y = .63 1.0 = 63% MPS = S Y = .37 1.0 = 37%

concepts such as the inflationary and deflationary gaps and multiplier.

 A recessionary gap exists when aggregate demand is too low. Equilibrium will result in a level of real GDP that does not fully employ resources. Disagreement exists over the ability of government to rectify this situation. If aggregate demand expands beyond the economy's ability to produce goods (full employment), an inflationary gap exists. Again, the need for government involvement is a matter of opinion. Manipulation of aggregate demand involves activities that will increase C, I, G, and XN. Changing consumption will have more than a linear effect on GDP. An increase in income will increase consumption. This increase in income will increase another person's income. A decrease in income decreases income. This decrease will decrease the income of other people. Changes will continue, but not indefinitely because saving acts as a leakage. This multiple effect of changes in consumption on GDP is the multiplier concept. K = change in real GDP / change in AD K = 1 / (1-MPC) = 1 / MPS Note: As MPS increases, K decreases because added income is not spent and therefore not respent.

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3. Calculate multiplier for each change in economic activity given in Question #1 on page 33.

K = 1 / (1-MPC) = 1 / MPS

K = 1 / (1-.72) = 1 / .28 = 3.57

K = 1 / (1-.63) = 1 / .37 = 2.70

K = 1 / (1-.51) = 1 / .49 = 2.04

Note: As MPS increases, K decreases

Chapter 13 Questions for homework

1. Explain the four functions of money. (see page 35)

2. Define fiat, token, and commodity money. (see page 35)

3. Compare M1, M2, and M3. (see page 35)

4. How much could the money supply expand with a reserve requirement of 8% and
an infusion of \$500 cash into the banking system in the form of a deposit made
by a customer? Why might the money supply probably not expand by this amount?

Including the infusion of \$500, demand deposits could increase by 12.5 times or \$6,250.

1 / R = 1 / .08 = 12.5 and (\$500)(12.5) = \$6,250.

Total expansion would be less because of a leakage consisting of the withdrawal
of cash (reserves) by consumers and excess reserves kept by banks.

1. What traditional fiscal policy measures are designed to diminish the impact of a recession?

Discretionary fiscal policy
A. Discretionary fiscal policy is the deliberate manipulation of government taxing and spending to control AD and the business cycle. B. AD = C + I + G + XN
C. Expansionary fiscal policy consists of reversing an economic downturn by increasing AD with deficit spending. ; 1. Lower taxes to increase Consumption (C) and Investment (I)
a. Personal income taxes
b. Capital gains taxes paid on the profit from the sale of commercial real estate, a company, and financial
assets (stocks and bonds) c. Investment tax credit which is a direct lowering of the tax liability of companies investing in certain approved
types of plant and equipment  2. Increase government spending (G)
3. The result will be a fiscal stimulus through deficit spending.
4. The impact of a fiscal stimulus, once implemented, will affect AD.
2. What fiscal measures were taken, or not taken, to diminish
the effects of the last recession and were those taken
successful?

2. What fiscal measures were taken, or not taken, to diminish the effects of the last recession and were those taken successful?

3. What were the political effects of the last recession?

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