case study help?

 

1.      
Suppose MPC is 0.8 initially. Households then change their behavior so that the MPC falls to 0.75. What happens to aggregate expenditures? Why?

2.      
What is a consumption function? Describe the graph of a consumption function and explain its shape. If total spending is consumption plus investment spending, how does an increase in the interest rate affect total spending?

 

3.      
Explain what would cause the government purchases function to increase. Will a change in social security spending affect government purchases?

 

4.      
 How is an aggregate demand curve derived? What would cause the aggregate demand curve to shift to the right?

 

5.      
For each of the following, explain whether it shifts the short-run aggregate supply curve, the long-run aggregate supply curve, or the aggregate demand curve (or more than one of these).

 

a. Households decide to save a smaller share of their disposable income.

b. There is an 8-week strike in the steel industry.

c. A drought in the Midwest causes poor wheat harvest.

d. The labor force participation rate increases.

 

Your response should be at least 75 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

                 

APA Guidelines

CSU requires that students use the APA style for papers and projects. Therefore, the APA rules for formatting, quoting, paraphrasing, citing, and listing of sources are to be followed. A document titled “APA Guidelines Summary” is available for you to download from the APA Guide Link, found in the Learning Resources area of the myCSU Student Portal. It may also be accessed from the Student Resources link on the Course Menu. This document provides links to several internet sites that provide comprehensive information on APA formatting, including examples and sample papers.

Submitting Case Studies

Once you have completed your Case Study, submit it by uploading through the “view/complete” link under the Assignment tab in Units II, IV, VI, and VIII. Do not e-mail your paper directly to your professor. By using the Assignment tab, your university record will automatically be updated to indicate you have submitted your Case Study and the assignment will be provided to your professor for grading.

 

 Course Textbook

McEachern, W. A. (2012). ECON Macro 3 (3rd ed.). Mason, OH: South-West

    

Case StudiesCase Studies
AGGREGATE EXPENDITURE

Case Study 9.1: The Life-Cycle Hypothesis

Do people with high incomes save a larger fraction of their incomes than those with low income? Both theory and

evidence suggest they do. The easier it is to make ends meet, the more income is left over for saving. Does it

follow from this that richer economies save more than poorer ones—that economies save a larger fraction of total

disposable income as they grow? In his famous book, The General Theory of Employment, Interest, and Money,

published in 1936, John Maynard Keynes drew

that conclusion. But as later economists studied

the data—such as that presented in the exhibit below—it became clear that

Keynes was wrong. The fraction of disposable income saved in an economy

seems to stay constant as the economy grows.

So how can it be that richer people save more than poorer people, yet

richer countries do not necessarily save more than poorer ones? Several

answers have been proposed. One of the most important is the life-cycle
model of consumption and saving. According to this model, young people
tend to borrow to fi nance education and home purchases. In middle age,

people pay off debts and save more. In old age, they draw down their savings,

or dissave. Some still have substantial wealth at death, because they are not

sure when death will occur and because some parents want to bequeath

wealth to their children. And some people die in debt. But on average net

savings over a person’s lifetime tend to be small. The life-cycle hypothesis

suggests that the saving rate for an economy as a whole depends on, among

other things, the relative number of savers and dissavers in the population.

A problem with the life-cycle hypothesis is that the elderly do not seem to draw down their

assets as much as the theory predicts. One reason, already mentioned, is that some want to leave

bequests to children. Another reason is that the elderly seem particularly concerned about covering

unpredictable expenses such as from divorce, health problems, or living much longer than the

average life span. Because of such uncertainty, many elderly spend less and save more than the

life-cycle theory predicts. Researchers have found that those elderly who have not experienced a

divorce or health problems build their net wealth well into old age.

Still, the life-cycle hypothesis offers a useful theory of consumption patterns over a lifetime.

SOURCES: Martin Browning and Thomas Crossley, “The Life-Cycle Model of Consumption and Saving,” Journal of Economic
Perspective 15 (Summer 2001): 3–22; OECD Economic Outlook 87 (May 2010); and James Poterba, Steven Venti, and David
Wise, “Family Status Transitions, Latent Health, and the Post Retirement Evolution of Assets,” NBER Working Paper 15789, (February 2010).

QUESTION
1. According to the life-cycle hypothesis, what is the typical pattern of saving for an individual over his or her lifetime? What impact does

this behavior have on an individual’s lifetime consumption pattern? What impact does the behavior have on the saving rate in the overall

economy?

9

life-cycle model of
consumption and
saving
young people borrow,
middle-agers pay off
debts and save, and
older people draw down
their savings; on average,
net savings over a lifetime
is usually little or nothing

U.S. Consumption Depends on Disposable Income

C
o

n
s
u

m
e
r

s
p

e
n

d
in

g
(t

ri
ll
io

n
s
o

f
2
0

0
5
d

o
ll
a
rs

)

0.0 1.0 2.0 3.0

4.0

5.1

4.5

Disposable income
(trillions of 2005 dollars)

5.0 6.0 7.0 8.0 9.0 10.0 1

1.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

1995

1985

1975

2005

2010

10.0

11.0

SOURCE: Based on estimates from the Bureau of Economic Analysis, U.S.
Department of Commerce. For the latest data, go to http://bea.gov/.

26692_CS_01-42.indd 1826692_CS_01-42.indd 18 11/11/11 6:07 PM11/11/11 6:07 PM

Case Study 9.2: Investment Varies Much More than

Consumption

Consumption averaged 70 percent of GDP during the most recent decade, and investment varied from year to year and averaged 16 percent

of GDP during the most recent decade. Now let’s compare the year-to-year variability of consumption and investment. The exhibit below shows

the annual percentage changes in GDP, consumption, and investment, all measured in real terms. Two points are obvious. First, investment

fl uctuates much more than either consumption or GDP. For example, in the recession year of 1982, GDP declined 1.9 percent but investment

dropped 14.0 percent; consumption actually increased 1.4 percent. In 1984, GDP rose 7.2 percent, consumption increased 5.3 percent, but

investment soared 29.5 percent. Second, fl uctuations in consumption and in GDP appear to be entwined, although consumption varies a bit

less than GDP. Consumption varies less than GDP because consumption depends on disposable income, which varies less than GDP.

During the six years of falling GDP over the last half century, the average decline in GDP was only 0.9 percent, but investment dropped

an average of 13.6 percent. Consumption actually increased by an average of 0.3 percent. So while consumption is the largest spending

component, investment varies much more than consumption and accounts for nearly all the year-to-year variability in real GDP. Note that GDP

does not always fall during years in which a recession occurs. That’s because the economy is not necessarily in recession for the entire year.

For example, because the recession of 2001 lasted only eight months, GDP managed a small gain for the year of 1.1 percent and consumption

grew 2.7 percent. It was the 7.0 percent fall in investment that caused the recession. That’s why economic forecasters pay special attention to

business expectations and investment plans.

SOURCES: Economic Report of the President, February 2010, Survey of Current Business 90, various months for 2010; and OECD Economic Outlook 87 (May 2010). For data and
articles about economic aggregates, go to the Bureau of Economic Analysis site at http://bea.gov/.

QUESTION
1. Why do economic forecasters pay special attention to investment plans? Take a look at the Conference Board’s index of leading economic

indictors at http://www.conference-board.org/. Which of those indicators might affect investment?

Annual Percentage Change in U.S. Real GDP, Consumption, and

Investment

A
n

n
u

a
l

p
e

rc
e

n
ta

g
e

c
h

a
n

g
e

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999

Investment

2003 2007 2011

30.0

GDP

Consumption

25.0

20.0

15.0

10.0
5.0
0.0

–5.0

–10.0

–15.0

–20.0

–25.0

SOURCE: Bureau of Economic Analysis, U.S. Department of Commerce. Figures for 2011 are projections based on annualized rates from the fi rst half of the year. For the latest
data, go to http://bea.gov/.

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