Suppose Lower Interest Rates Suddenly Lead to an Injection of $325

question 27

Multiple Choice

Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80.Complete Table 10.1 by calculating the spending cycles as the increased investment spending works its way through the economy. $\begin{array}{lll} & \text { Change in this Cycle's } & \text { Cumulative Increase in } \\\text { Spending Cvcles } & \text { Spending and Income } & \text { Spending and Income }\\\hline\text { First-cycle spending }&\$325&\$325\\\text { Second-cvele spending }&\_\_\_&\_\_\_\\\text { Third-cycle spending }&\_\_\_&\_\_\_\end{array}$

$\text { Table } 10.1$ In Table 10.1,what is the change in the second cycle of spending resulting from the higher initial investment?

• A)$65.
• B)$1,625.
• C)$325.
• D)$260.

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Definitions:

Behavioral Economists

Academics who study the role of psychological, cognitive, emotional, cultural, and social influences on the economic choices of individuals and institutions.

Time Inconsistency

A situation where a person's preferences change over time, leading to decisions that might contradict earlier plans or promises.

Self-Control Problems

Challenges individuals face in resisting short-term temptations in order to achieve long-term goals, often leading to decisions that are not in their best interest.

Dictator Game

A behavioral economics experiment that tests how fairly individuals allocate resources when one person (the "dictator") has complete control over the distribution.