Econ Chapter 8

2) The APC show the fractions of any total income that are consumed and saved while MPC show The fractions of any change in total income that are consumed and saved. The sum of the MPC and the MPS equal 1 because consuming and saving our of extra income is an either-or proposition, and the fraction of any change in income not consumed is saved. The basic determinants of the consumption and saving schedules are wealth, expectations, real interest rates, and household debt.

3) a) a large increase in the value of real estate, including private houses, would increase the consumption schedule and decrease the saving schedule. b) a decline in the real interest rate would increase the consumption schedule and decrease the saving schedule. c) a sharp, sustained decline in stock prices would shift consumption schedules down and shift saving schedules up. d) an increase in the rate of population growth will increase the investment schedule e) the development of a cheaper method of manufacturing computer chips would increase the investment schedule. f) a sizeable increase in the retirement age for collecting social security benefits would decrease the consumption schedule and increase the saving schedule. g) an increase in the federal income tax would shift the consumption schedule downwards while shifting the saving schedule upwards.

4) An upward shift of the consumption schedule typically involves an equal downshift of the saving schedule in order to maintain the sum of one. When people buy more, they save less, and when people save more, they buy less. The compensation of one for the other helps maintain the equation MPC + MPS = 1. The same reason also applies if there is a downward shift of the

consumption schedule and an equal upward shift of the saving schedule.