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5 Cards in this Set
- Front
- Back
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Discuss what is meant by the paradox of saving. |
As people attempt to save more, the result is both a decline in output and unchanged saving. Although people want to save more at a given level of income, their income decreases by an amount such that their saving is unchanged. As people save more at their initial level of income, they decrease their consumption. But this decreased consumption decreases demand, which decreases production. |
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Explain what the multiplier represents. |
The multiplier represents how a change in autonomous spending has a different effect on output than the actual change in autonomous spending. |
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Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier. |
If you have a lower MPC, you have a higher multiplier. This would assume that an economy with a lower MPC will be greater effected by any change in autonomous spending. |
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Suppose that, at a given level of disposable income, consumers decide to save more. Explain what effect this decision will have on equilibrium income. Also, explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium. |
Equilibrium income will decrease if people decide to save more. As people save more, their MPC lowers. B/c of this they have less demand to consume, so then output would decrease.
When income falls, people save more. However, they are making less, so the net amount of savings stays the same. |
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Explain what factors cause shifts and changes in the slope of the ZZ curve presented in chapter 3. |
- nonresidential: purchase by firms of new plants or new machines. - residential: the purchase by people of new houses or apartments. |
