Tag: consumption and investment functions

Questions Related to consumption and investment functions

The consumption function depends on _______________.

economics consumption and investment functions determinants of consumption function and savings function production, consumption, saving and economic units ex ante and ex post

  1. interest

  2. savings

  3. wealth

  4. income

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Correct Option: D
Explanation:

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

If income in terms of wage rate ___________, consumption expenditure __________.

economics consumption and investment functions determinants of consumption function and savings function production, consumption, saving and economic units ex ante and ex post

  1. increases, decreases

  2. increases, increases

  3. decreases, increases

  4. decreases, decreases

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Correct Option: B
Explanation:

If income in terms of wage rate increases, then consumption expenditure also increases which is called the wage-price spiral where the wages are increased due to excessive price in the economy and price in increased due to excessive wage and consumption demand in the economy. 

AD curve is a _________________.

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. Horizontal straight line parallel to the X-axis

  2. upward sloping curve

  3. downward sloping curve

  4. Vertical straight line parallel to the Y-axis

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Correct Option: B
Explanation:

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year. 

AD curve is upward sloping owing to increasing income in the economy as the income increases, the expenditure by the people also increases which leads to rising AD. Therefore, income and AD has a positive relationship between them. 

Out of the following, which can have a value more than one?

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. MPC

  2. APC

  3. APS

  4. MPS

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Correct Option: B
Explanation:

APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income which can be more than one because there are situations in the economy when consumption is more national income, i.e. before the break-even point, APC > 1. 

If the saving function is S =- 20 + 0.3Y, then what will be the value of MPC?

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. 0.3

  2. 0.7

  3. -0.7

  4. 1

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Correct Option: B
Explanation:

Saving function is given in the form of: 
$S = -\bar{C}+sY$
where,

$-\bar{C} = autonomous\ consumption$,
$s = marginal\ propensity\ to\ save\ (MPS).$

Given, $MPS = 0.3$
It is a known fact that, $MPS + MPC = 1$ 
$MPC = 1 - MPS = 1 - 0.3 = 0.7$

A reduction in government spending leads to fall in the income and purchasing power of the people.

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. True

  2. False

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Correct Option: A
Explanation:

Reduction in government spending will reduce the level of aggregate demand, which will lead to fall in the income and purchasing power of the people. (The extent of fall in the income and purchasing power depends on the size of multiplier).

Which of the following is not the reason for excess demand?

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. Fall in the propensity to consume

  2. Reduction in taxes

  3. Increase in investments

  4. Deficit Financing

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Correct Option: A
Explanation:

Propensity to consume refers to the proportion of income used as consumption expenditure. The fall in the propensity to consume is not responsible for creating excess demand in an economy.

When marginal propensity to consume is greater than marginal propensity to save, the value of investment multiplier will be greater than 5.

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. True

  2. False

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Correct Option: B
Explanation:

False. 

If MPC = 0.6, then MPS = 0.4 but 
Multiplier (k) = 1/MPS = 1/0.4 = 2.5. 
So even if the value of MPC is greater than MPS then also multiplier is smaller than 5.

There is an Inverse relationship between the value of marginal propensity to save and investment multiplier. 

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. True

  2. False

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Correct Option: A
Explanation:

True.

 The value of multiplier and MPS are inversely related as multiplier is the reciprocal of MPS. 
Multiplier(k) = 1/ MPS. 

The maximum value of multiplier is when the value of MPC is _________.

economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

  1. Infinity, zero

  2. Infinity, one

  3. One, infinity

  4. None of these

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Correct Option: A
Explanation:

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume. 

Therefore, the value of multiplier will be maximum when the value of MPC is either infinity or zero.