Question

Which of the following is true? A. The MPC is less than zero. B. The MPC...

Which of the following is true?

A. The MPC is less than zero. B. The MPC is greater than one. C. The MPC is the fraction of additional disposable income that households spend. D. The MPC is equal to consumption. E. The MPC is the fraction of additional disposable income that households save.

Show the effect of an increase in the interest rate on investment. To do this you must do which of the following?
a) Add a second investment demand line to the graph to indicate a shift in the demand curve. You should place it above or below the first one depending on whether you believe investment demand increases or decreases. Label your new line Inv D 2.
b) Add a second point with drop lines on the unchanged investment demand line to indicate a movement along the investment demand curve.

Show the effect that a reduction in expected future sales and profits of firms has on investment demand. To do this, you must do which one of the following?
a) Add a second investment demand line to the graph. You should place it above or below the first one depending on whether you believe investment demand increases or decreases. Label your new line Inv D 2.
b) Add a second point with drop lines on the unchanged investment demand line to indicate a movement along the investment demand curve.
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Homework Answers

Answer #1

1. Ans: The MPC is the fraction of additional disposable income that households spend.

2. Ans: Add a second point with drop lines on the unchanged investment demand line to indicate a movement along the investment demand curve.

Explanation:

Interest rate and investments are inversely related. A change in interest rate can be shown by a movement along the same investment demand curve. Any change in other factors, except interest rate, will lead to a shift in investment demand curve.

3. Ans: Add a second investment demand line to the graph. You should place it above or below the first one depending on whether you believe investment demand increases or decreases. Label your new line Inv D 2.

Explanation:

Any change in other factors, except interest rate, will lead to a shift in investment demand curve.

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