CHAPTER 23

1.1 Briefly define the following terms and explain the relationship between MPC and MPS and
the relationship between aggregate output and aggregate income.
1. MPC
2. MPS
3. Aggregate Output
4. Aggregate Income

1. MPC
The marginal propensity to consume (MPC) is the proportion of an aggregate
raise in pay that a consumer spends on the consumption of goods and
services, as opposed to saving it.
2. MPS
The marginal propensity to save (MPS) is the fraction of an increase in
income that is not spent on an increase in consumption. That is, the marginal
propensity to save is the proportion of each additional dollar of household
income that is used for saving. It is the slope of the line plotting saving against
income.
3. Aggregate Output
The sum of all the goods and services produced in an economy over a certain
period of time. In other words, aggregate output is defined as an economy's
total productivity, or GDP.
4. Aggregate Income
Aggregate income is the total of all incomes in an economy without
adjustments for inflation, taxation, or types of double counting. Aggregate
income is a form of GDP that is equal to Consumption expenditure plus net
profits.

The relationship between MPC and MPS

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.

The relationship between aggregate output and aggregate input

Aggregate output and aggregate income are barometers that help a country
determine the health of its nation.

2.1 Explain the difference between actual investment and planned

investment. When are actual investment and planned investment equal?
When is actual investment greater than planned investment? When is actual
investment less than planned investment?
 Actual investment represents the amount of investment that takes place during a
given period. Actual investment, therefore, also takes into account any unplanned
changes in inventories. Planned investment represents those additions to the
capital stock that are planned by firms.

Actual investment equals planned investment only when inventories decline.

Actual investment to exceed planned investment. For this to occur, production must
exceed sales. In this case, firms experience an unplanned increase in inventories that
causes actual investment to exceed planned investment.
Actual investment less than planned investment when firms sold more output
than expected

3.1

When interest rates rise, consumers with debts are going to have to pay more interest to
lenders. This typically has a negative effect on their spending habits because the more
money they have to pay to keep their loans current, the less disposable income they will
have to spend on products and services. If you own a business that deals in luxury
products or services, you may be hit harder by a rise in interests rates than a company
providing basic staples, because luxury items are usually the first thing consumers
eliminate when they have less disposable income.
Therefore the economy is likely to experience falls in consumption and
investment.
When interest rates are high, investment becomes more expensive. As money
becomes more expensive to borrow, businesses, governments and individuals
start slowing their investment plans.

2.5 Balanced budget multiplier

Balanced Budget Multiplier is the ratio of the change in aggregate output
(GDP) to a change in government spending, which is matched by an
equal change in taxes. The balanced-budget multiplier is equal to one, meaning
that the multiplier effect of a change in taxes offsets all but the initial production
triggered by the change in government purchases.

1.5 correct the statement

economy is in equilibrium when planned aggregate expenditure equals aggregate
output. (AE = Y)

1.1 cigarette as money

German prisoner of war camp during World War II, you might have used cigarettes
for money. Cigarettes began to circulate as money, quite naturally, in order to solve
the problem of double coincidence of wants. The Red Cross brought care packages
in to the prisoner of war camps and gave prisoners little packages that contained
 chocolate, cheese, other goods, and cigarettes. If you did not want cigarettes, and
you did not want chocolate, you could make a trade. If you had cheese and wanted
chocolate, you could trade your cheese for cigarettes, knowing that eventually you
would be able to trade the cigarettes for chocolate when you found the right trading
partner. Cigarettes began to circulate as money, the medium of exchange. They also
began to fulfill the other roles that money plays, a unit of account. That is, prices
began to be quoted in cigarettes. It cost 80 cigarettes to buy a shirt or 2 cigarettes
to get a shirt laundered. Also, cigarettes began to be used as a store of value. People
would hoard cigarettes as a kind of savings and spend them whenever they needed
to buy something. So cigarettes were a kind of commodity money, circulating,
being saved, and being used as a unit of account.

1.5
Bitcoin is a form of digital “currency”. It is created and held
electronically on a computer. Bitcoins are not paper money like
dollars, euro or yen by central banks or monetary authorities. Through
the years, there is obvious contra about bitcoin as money. For me,
bitcoin is not money because it doesn’t fulfill the qualification of
money. Here are the reasons.
Money must be a medium of exchange.

 A private medium of exchange that is not accepted universally and lacks stability cannot be
considered money.
 That is why bitcoin is not money.

In this sense, bitcoin, acting like virtual cash, can perform functions similar to
currencies' as a medium of exchange.

Money must be a unit of account

 No one I know or have ever heard of says their net worth is

defined as some number of Bitcoins. They use dollars, euros, or
Japanese yen, etc.

Money needs to be a store of value

 In case you haven't noticed, Bitcoin prices swing back and forth in
a way that makes an Alpine landscape look flat. So far, Bitcoin has
not shown itself to be a stable store of value.