AP_Krugman_Textbook

module 16 Income and Expenditure 171

Section 4 National Income and Price Determination

c. level of actual investment spending.

d. interest rate.

e. all of the above.

5. Actual investment spending in any period is equal to
   a. planned investment spending +unplanned inventory
   investment.

b. planned investment spending −unplanned inventory

investment.

c. planned investment spending +inventory decreases.

d. unplanned inventory investment +inventory increases.

e. unplanned inventory investment −inventory increases.

Tackle the Test: Free-Response Questions

Answer (7 points)

1 point:0.8

1 point:$47,000

1 point:Vertical axis labeled “Consumer spending” and horizontal axis labeled

“Current disposable income”

1 point:Vertical intercept of $15,000

1 point:Upward sloping consumption function

1 point:0.8

1 point:Consumption function shifts downward

2. List the three most important factors affecting planned
   investment spending. Explain how each is related to actual
   investment spending.

Consumer

spending

Current disposable income

$15,000

cf 2

cf 1

0

1. Use the consumption function provided to answer the
   following questions.
   c=$15,000+0.8×yd
   a. What is the value of the marginal propensity to consume?
   b. If individual household current disposable income is
   $40,000, individual household consumer spending will
   equal how much?
   c. Draw a correctly labeled graph showing this consumption
   function.
   d. What is the slope of this consumption function?
   e. On your graph from part c, show what would happen if
   expected future income decreased.