Tag: consumption and investment functions

Questions Related to consumption and investment functions

In a country, consumption amount is Rs. 7,200 crore which is 60 per cent of its total disposable income. What is the amount of disposable income?

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. Rs 4,320 crore

  2. Rs 12,000 crore

  3. Rs 43,200 crore

  4. Rs 1,200 crore

Show answer
Correct Option: B
Explanation:

Here APC = 60% or 0.6, C = 7,200

Since, APC = $\dfrac{C}{Y}$,
Y = $\dfrac{C}{APC}$ . 
where, Y = Disposable income,
and C = Consumption

Y = $\dfrac{7200}{0.6}$ $= \text{12,000 crore}.$

What exactly does MPC (Marginal Propensity to Consume) communicate?

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 measures the change in the amount of consumption due to a change in income between two time periods.

  2. MPC measures the proportion of income devoted for consumption purposes in the specific period of time for which data is given.

  3. MPC measures the change in the amount of consumption due to a change in savings between two time periods.

  4. MPC measures the proportion of income devoted for saving purposes in the specific period of time for which data is given.

Show answer
Correct Option: A
Explanation:

Consumption is dependent on income and thus, consumption changes with change in income. Marginal Propensity to Consume (MPC) refers to the change in consumption level that takes place due to an additional unit of income earned. 
Symbolically: $MPC=\dfrac{\text{Change in consumption}}{\text{Change in income}}$

Consumption depends on which of the following?

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. Total Savings

  2. Needs

  3. Total Income

  4. Total Disposable Income

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Correct Option: D
Explanation:

Everybody needs income to purchase goods and services. Higher the level of income, higher will be the capacity to buy the goods and services. So for an individual, the total amount of goods and services to be purchased depends on the available disposable income.

Similarly, for an economy as a whole, it can be said that the aggregate consumption of all depends on the total income generated in the economy. When the total income of the economy increases total consumption of the economy will also increase. When we refer to income, we normally mean disposable income. Disposable income is that part of total income which is available for consumption and saving.

Disposable income is defined as the income remained after payment of taxes and fines. If tax payment in high, disposable income will be lower and vice versa. 

In a country, consumption amount is Rs. 900 crore which is 90 percent of its total disposable income. What is the amount of disposable income?

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. Rs 8,100 crore

  2. Rs 810 crore

  3. Rs 1000 crore

  4. Rs 100 crore

Show answer
Correct Option: C
Explanation:

Here APC = 90% or 0.6, C = 9,000

Since, APC = $\dfrac{C}{Y}$,
Y = $\dfrac{C}{APC}$ . 
where, Y = Disposable income,
and C = Consumption

Y = $\dfrac{900}{0.9}$ $= \text{1,000 crore}.$

If income changes from 1000 to 1500 and saving changes from 200 to 250, then calculate APS . 

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. 0.2

  2. 0.16

  3. 0.2 for the time period 1 and 0.16 for the time period 2

  4. 0.16 for the time period 1 and 0.2 for the time period 2

Show answer
Correct Option: C
Explanation:

APS $= \dfrac{Savings}{Income}$


We can calculate APS for both time period.

In the first time period, S = 200 and Y = 1000. 
APS = $\dfrac{200}{1000} = $ $0.2$

 In the second time period, S = 250 and Y = 1500. 
APS = $\dfrac{250}{1500} =$ $0.16$

In an economy, the population spends Rs 700 crore on absolute necessities needed to sustain themselves. The current income is Rs 3500 crore and MPC is 0.8. What is the level of consumption?

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. Rs 2800 crore

  2. Rs 3500 crore

  3. Rs 1450 crore

  4. Rs 1750 crore

Show answer
Correct Option: B
Explanation:

Keynesian consumption function is given as: C = a + bY 

where, C= Consumption, 

a = autonomous consumption and 

b = marginal propensity to consume 

C = 700 + (0.8 x 3500) = 2800.

Consumption = Rs. 3500 crore.

If MPC = 0.8 and fixed consumption is 200, write the saving equation.

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. S = -200 - 0.8Y

  2. S = -200 + 0.2Y

  3. S = 200 + 0.8 Y

  4. S = -200 + 0.8 Y

Show answer
Correct Option: B
Explanation:

The Keynesian saving function is given as: S = -a +(1- b) Y 

where, S= Savings, 

Y = Income

a = autonomous consumption and 

b = marginal propensity to consume 

S = -200 + (1- 0.8) x Y 

S = -200+0.2Y

If MPC = 0.7 and fixed consumption is 700, write the saving equation.

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. S = 700 - 0.7Y

  2. S = 0.7 Y + 700

  3. S = -700 + 0.3Y

  4. S = 700 - 0.3Y

Show answer
Correct Option: C
Explanation:

The Keynesian saving function is given as: S = -a +(1- b) Y 

where, S= Savings, 

Y = Income

a = autonomous consumption and 

b = marginal propensity to consume 

S = -700 + (1- 0.7) x Y  

S = -700 + 0.3 Y

If income changes from 3000 to 4500 and saving changes from 600 to 900, then calculate APS?

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

  1. 0.20

  2. 0.33

  3. 0.13

  4. 0.25

Show answer
Correct Option: A
Explanation:

APS $= \dfrac{Savings}{Income}$


We can calculate APS for both time period.

In the first time period, S = 600 and Y = 3000. 
APS = $\dfrac{600}{3000} = $ $0.2$

 In the second time period, S = 900 and Y = 4500. 
APS = $\dfrac{900}{4500} =$ $0.2$

In an economy, the population spends Rs 150 crore on absolute necessities needed to sustain themselves. The current income is Rs 450 crore and MPC is 0.6. What is the level of consumption?

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. Rs. 270 crore

  2. Rs. 450 crore

  3. Rs 420 crore

  4. Rs 470 crore

Show answer
Correct Option: C
Explanation:

The Keynesian consumption is given as: C = a + bY 

where, C= Consumption, 

a = autonomous consumption and 

b = marginal propensity to consume 

C = 150 + (0.6 x 450) = 420.

Consumption = Rs. 420 crore.