Check Your Understanding

1. Question

   Explain why a decline in investment spending caused by a change in business expectations leads to a fall in consumer spending.

2. Question

   What is the spending multiplier if the marginal ropensity to consume is 0.5? What is it if MPC is 0.8?

3. Question

   Suppose a crisis in the capital markets makes consumers unable to borrow and unable to save money. What implication does this have for the effects of expected future disposable income on consumer spending?

4. Question

   For each event, explain whether the initial effect is a change in planned investment spending or a change in unplanned inventory investment, and indicate the direction of the change.

   1. an unexpected increase in consumer spending

   2. a sharp rise in the interest rate

   3. a sharp increase in the economy’s growth rate of real GDP

   4. an unanticipated fall in sales