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CHAPTER 9
Building the Aggregate Expenditures Model
A. Short-Answer, Essays, and Problems
New 1. What are the simplifying assumptions for this chapter? What are two implications from
these simplications?
2. Define the consumption and saving schedules.
3. Explain how consumption and saving are related to disposable income in the aggregate
expenditures model.
4. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government
and all saving is personal saving.
Level of output
and income
$250
275
300
325
350
375
400
Consumption
$260
____
____
____
____
____
____
Saving
$___
___
___
___
___
___
___
5. Complete the following table assuming that (a) MPS = 1/3, (b) there is no government
and all saving is personal saving.
Level of output
and income
$100
130
160
190
220
250
Consumption
$120
____
____
____
____
____
Saving
$___
___
___
___
___
___
6. Differentiate between the average propensity to consume and the marginal propensity to
consume.
7. What are the marginal propensity to consume (MPC) and marginal propensity to save
(MPS)? How are the two concepts related? How are the two concepts related to the
consumption and saving functions?
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Chapter 9
8. Suppose a family’s annual disposable income is $8,000 of which it saves $2,000.
(a) What is their APC?
(b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS
and MPC?
(c) Did the family’s APC rise or fall with their increase in income?
9. Complete the accompanying table.
Level of output
and income
(GDP = DI)
Consumption
$480
$___
520
___
560
___
600
___
640
___
680
___
720
___
760
___
800
___
Saving
$–8
0
8
16
24
32
40
48
56
APC
____
____
____
____
____
____
____
____
____
APS
____
____
____
____
____
____
____
____
____
MPC
___
___
___
___
___
___
___
___
___
MPS
___
___
___
___
___
___
___
___
___
(a) Using the below graphs, show the consumption and saving schedules graphically.
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Building the Aggregate Expenditures Model
(b) Locate the break-even level of income. How is it possible for households to dissave
at very low income levels?
(c) If the proportion of total income consumed decreases and the proportion saved
increases as income rises, explain both verbally and graphically how the MPC and MPS
can be constant at various levels of income.
10. Complete the accompanying table.
Level of output
and income
(GDP = DI)
Consumption
$100
$___
125
___
150
___
175
___
200
___
225
___
250
___
275
___
300
___
Saving
$–5
0
5
10
15
20
25
30
35
APC
____
____
____
____
____
____
____
____
____
APS
____
____
____
____
____
____
____
____
____
MPC
___
___
___
___
___
___
___
___
___
MPS
___
___
___
___
___
___
___
___
___
(a) What is the break-even level of income? How is it possible for households to
dissave at very low income levels?
(b) If the proportion of total income consumed decreases and the proportion saved
increases as income rises, explain how the MPC and MPS can be constant at various
levels of income.
11. List four factors which could shift the consumption schedule.
New 12. What is the effect of increase in wealth on the consumption and saving schedules?
New 13. Other things being constant, what will be the effect of each of the following upon the
equilibrium level of GDP?
(a) An increase in the amount of liquid assets consumers are holding
(b) A sharp rise in stock prices
(c) A rapid upsurge in the rate of technological advance
(d) A sharp increase in the interest rate
New 14. Explain the difference between a movement along the consumption schedule and a shift
in the consumption schedule.
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Chapter 9
15. Use the graphs below to answer the following questions:
(a) What types of schedules do graphs A and B represent?
(b) If in graph A line A2 shifts to A3 because households consume more and this change
is not due to changing taxes, then in graph B, what would happen to line B2?
(c) If in graph B, line B2 shifts to B1 because households save less, then in graph A,
what will happen to line A2?
(d) In graph A, what has caused the movement from point A to point B on line A2?
(e) If there is a lump-sum tax increase causing line A2 to shift to A1, then in graph B,
what will happen to B2?
16. Describe the relationship shown by the investment demand curve.
17. Use the following data to answer the questions.
Expected rate
of return
Cumulative amount
of investment
(billions)
11%
10
8
5
3
1
$55
75
90
105
150
190
(a) Explain why this table is essentially an investment demand schedule.
(b) If the interest rate was 8%, how much investment would be undertaken?
(c) Why is there an inverse relationship between the rate of interest and the amount of
investment?
18. List five events that could cause a shift in the investment demand curve.
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Building the Aggregate Expenditures Model
19. What is the difference between the investment-demand curve and the investment
schedule for the economy?
20. State four factors that explain why investment spending tends to be unstable.
21. Compare the determinants of the consumption schedule and the investment schedule.
Most economists regard the investment schedule as being less stable than the
consumption schedule. Looking at the determinants of the two schedules, support this
contention.
22. Define the equilibrium level of output.
New 23. Explain why saving equals planned investment at equilibrium GDP.
24. Explain the difference between an equilibrium level of GDP and a level of GDP which
is in disequilibrium.
25. In a graph relating private spending (C + Ig ) to real gross domestic product (GDP), what
does the 45-degree line represent?
26. Use the graph below to explain the determination of equilibrium GDP by the aggregate
expenditures-domestic output approach. At equilibrium C + Ig = Real GDP ($550 + $50
= $600). Why does the intersection of the aggregate expenditures schedule and the 45degree line determine the equilibrium GDP?
27. What differentiates the planned equilibrium level of investment from disequilibrium
levels of investment? Explain.
28. Explain the difference between planned and actual investment in the economy. Why is
the distinction important?
29. What is the relationship between actual investment, planned investment, and saving in
an economy? What conditions among these concepts produce equilibrium?
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Chapter 9
New 30. (Last Word) Explain Say’s law.
New 31. (Last Word) “If production results in income and income is the source of spending, it
would seem that the production of a full-employment economy would automatically
guarantee enough spending to sustain itself. How, then, can unemployment occur?”
Explain.
New 32. (Last Word) What two events undermined the theory that supply creates its own
demand?
New 33. (Last Word) Contrast the classical and Keynesian views of unemployment.
34. Advanced analysis: Suppose that the linear equation for consumption in a hypothetical
economy is C = 50 + 0.9 Y. Also suppose that income (Y) is $400. Determine the
following: (a) MPC; (b) MPS; (c) level of consumption; (d) APC; (e) APS.
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