1. For each of the following two-variable relationships: i)the consumption funct
ID: 1216684 • Letter: 1
Question
1. For each of the following two-variable relationships: i)the consumption function ii)the savings function iii)the investment demand function iv) the multiplier, indicate, a. the dependent variable b.the independent variable c. the nature of the relationship (+ or -) 2. Describe using a plus for an increase (+), a minus for a decrease (-), and an equal sign for remains the same (=) how each of the following events will affect the consumption function, savings function and investment function. Events: a. A large increase in the value of real estate, including private houses. b. A decline in the real interest rate. c. A sharp, sustained decline in stock prices. d. An increase in the rate of population growth. e.The development of a cheaper method of manufacturing computer chips. f. A sizable increase in the retirement age for collecting Social Security benefits.
Explanation / Answer
Answer 1
MPS -
MPC +
Event a A large increase in the value of real estate, including private houses.
Consumption function - +
as value of houses increases MPC increases
savings function -
more of savings will go in buying houses,thus MPS will fall
investment function -
investments will fall as ROI increases with more demand
b. A decline in the real interest rate
consumption function +
consumption increases as ROI falls
savings function -
savings positively related so will fall with fall in ROI
investment +
investments will increase
c. A sharp, sustained decline in stock prices.
consumption ,saving & investment =
d. An increase in the rate of population growth.
consumption function +
as population increases so consumption in economy increases
savings function -
investment +
e.The development of a cheaper method of manufacturing computer chips
consumption & saving =
investment +
f. A sizable increase in the retirement age for collecting Social Security benefits
consumption & saving & investment =
dependent variable independent variable nature of relation consumption function consumption income + savings function savings income + investment demand function investment ROI - Multiplier K MPS and MPCMPS -
MPC +
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