Explain the relationship among household disposable income, consumption, and savings. What is Marginal Propensity to Consume (MPC) and what does an MPC of 0.9 tell us about consumption and saving? Use an example to explain MPC.
Explain the following statement: "Changes in disposable income lead to movements along the consumption function while changes in wealth lead to a shift of the consumption function." Use examples to illustrate your response.
What impact would you expect each of the following events to have on business cycles? Label each as a demand-side or supply-side shock.
- Defense production increases due to the imminent threat of war
- Net exports decline due to a deep recession in Europe
- A sharp increase in technology innovation leads to significant productivity growth
What economic policy changes might you expect in response to each of these events?
Explain the following statement: Any deviation from planned output or planned expenditures (Consumption + Investment) will throw the economy into disequilibrium. To illustrate your explanation, provide an example of how actual output might deviate from planned output and how actual expenditures might deviate from planned expenditures. List any economic reactions might you expect in the examples you provide.