ECONOMICS

CHAPTER 21 SAMUELSON & NORDHAUS

CONSUMPTION & INVESTMENT
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Personal saving is that part of

personal income that is not
consumed and it equals income
minus consumption.
Personal saving as a percent of
disposable income is called the
personal saving rate.
The personal saving rate is personal
saving as a percent of disposable
income.
The consumption function shows the
relationship between the level of
consumption expenditures and the
level of disposable personal income.
The level of disposable income at
which households just break-even is
found where the consumption
schedule intersects the 45-degree
line from the origin.
The marginal propensity to consume
is the extra amount that people
consume when they receive an extra
dollar of disposable income.
The slope of the consumption
function is the marginal propensity to
consume.
The marginal propensity to consume
is the slope of the consumption
function.
The marginal propensity to save is
the fraction of an extra dollar of
disposable income that is saved.
MPS = 1 - MPC and MPC = 1 - MPS
are both correct.
The life-cycle hypothesis assumes
that people save in order to smooth
their consumption over their lifetime.
The wealth effect states that higher
wealth leads to higher consumption.
I denotes gross private domestic
investment.
Business expectations are a
determinant of investment.
Demand for output produce by the
new investment, interest rates and
taxes that influence the costs of the
investment, and business
expectations are all determinants of
investment.
Investment fluctuations are the
primary cause of periods of recession
and economic growth.

CHAPTER 23 SAMUELSON & NORDHAUS

MONEY AND THE FINANCIAL SYSTEM
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Medium of exchange is a function of

money.
Means of barter and importation is
not a function of money.
Barter refers to the exchange of
goods for other goods.
Barter refers to the exchange of
goods for other goods.
Money is anything that servers as a
commonly accepted medium of
exchange.
M1 consists of coins, paper currency,
and checking accounts.
A savings account would be included
in M2.
The amount of interest paid per unit
of time expressed as a percentage of
the amount borrowed is called the
interest rate.
The dollar value today of a stream of
income over time is called the
present value.
An asset is liquid if it can be quickly
converted into cash with little or no
loss of value.
The real interest rate is corrected for
inflation and is the nominal interest
rate minus inflation.
The transactions demand for money
arises from the need to have money
to pay for purchases of goods and
services.
The assets demand for money arises
from the need for people sometimes
to hold money as an asset or store of
value.
Financial intermediaries, like banks
and insurance companies, take
deposits of funds from one group and
lends them to other groups. See page
Assets that banks hold in the form of
cash or in funds deposited with the
central bank are called reserves.
The ratio of new checking deposits to
the increase in reserves is called the
money-supply multiplier.
A financial derivative is a financial
instrument whose value is based on
the values of other assets.