Final review --- economics Assignment Example | Topics and Well Written Essays - 250 words

Final review --- economics - Assignment Example 22. Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will be permanently higher and output will be restored to the natural rate. 9. In the Keynesian-cross model, if the MPC equals .75, then a $1 billion increase in government spending increases planned expenditures by S.75 billion and increases the equilibrium level of income by more than S. 75 billion Marginal Propensity to Consume (MPC) is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). The proportion of the disposable income which individuals desire to spend on consumption is known as propensity to consume. MPC is the proportion of additional income that an individual desires to consume. The tax multiplier is the ratio of the change in aggregate production to an autonomous change in government taxes when consumption is the only induced expenditure. Autonomous tax changes trigger the multiplier process and induced consumption provides the cumulatively reinforcing interaction between consumption, aggregate production, factor payments, and income. MPC and MPS have an inverse relationship. Because they add up to 100 percent, as MPS increases, MPC decreases and vice versa. For example, if a company earns an extra $200 per month in income and consumes, or spends, $100 extra per month, $100 per month is saved. The MPS and MPC are both 50 percent. If the business starts to spend $150 per month, only $50 is saved. The MPC increases to 75 percent, while the MPS decreases to 25 percent. 19. According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. 26. An increase in