Tag: consumption and investment functions

Questions Related to consumption and investment functions

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 saving?

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 30 crore

  2. Rs 270 crore

  3. Rs 420 crore

  4. Rs 180 crore

Show answer
Correct Option: A
Explanation:

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

where, S= Savings, 

a = autonomous consumption and 

b = marginal propensity to consume (MPC)

S = -150 + (1- 0.6) x 450 = 30.
Saving = Rs. 30 crore.

In an economy, the population spends Rs 500 crore on absolute necessities needed to sustain themselves. The current income is Rs 2500 crore and MPC is 0.5. 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 1250 crore

  2. Rs 1500 crore

  3. Rs 1750 crore

  4. Rs 2500 crore

Show answer
Correct Option: C
Explanation:

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

where, C= Consumption, 

a = autonomous consumption and 

b = marginal propensity to consume 

C = 500 + (0.5 x 2500) = 1750.

Consumption = Rs. 1750 crore.

If MPC = 0.8 and fixed consumption is 600, write the consumption 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. C = 600 + 0.8Y

  2. C = 600 - 0.8Y

  3. C = 600 + 0.2Y

  4. C = 0.2 Y - 600

Show answer
Correct Option: A
Explanation:

The Keynesian consumption function is given as: C = a + b Y 

where, C= Consumption, 

Y = Income

a = autonomous consumption and 

b = marginal propensity to consume 

So C = 600 + 0.8 Y

Which of the following factors don't affect the propensity to consume in an economy?

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. Rate of interest

  2. Wealth

  3. Taxes

  4. Consumer credit

Show answer
Correct Option: C
Explanation:

The factors that influence consumption and savings behaviour in the economy are as follows:

Rate of interest: Commercial bank offer a certain rate of interest on the deposits held by public and charges rate of interest on the loans given to public. When people do not want to purchase goods and services, they keep their money in the bank to earn the rate of interest. But when they want to buy goods and services, they withdraw money from the bank and lose interest in the process. In this way, the rate of interest plays an important role in influencing a persons decision to consume.

Wealth: Propensity to consume is influenced by a persons holding of wealth. People who have wealth in the form of gold, jewellery, ownership of land and building, shares and bonds etc enjoy a higher level of income generated from the wealth. Accordingly, their consumption level will be higher.

Consumer credit: Availability of consumer credit influences consumption behaviour to a large extent in the economy. There are many durable goods which consumers want to buy. But due to lack of credit facility, they are not able to buy them as they are costly items.

The Consumption Function shows the _____________ .

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. relationship between consumption and income.

  2. relationship between investment and saving.

  3. relationship between consumption and saving.

  4. relationship between income and saving.

Show answer
Correct Option: A
Explanation:

The Consumption Function describes the functional relationship between Consumption and Income. 

$C= f(Y)$
Here, C is the dependent variable and Y is the independent variable. It is mainly used to describe the relation between Total Consumption and National Income on the aggregate level.

In dealing with Propensity to consume, Keynes considered two attributes:

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. APC and MPC

  2. APS AND MPS

  3. Demand and Supply

  4. Income and consumption

Show answer
Correct Option: A
Explanation:

In dealing with Propensity to consume, Keynes considered two attributes: 

1. APC : APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. 
Average propensity to consume = C/Y where C is the consumption and Y is the income in the economy 

2. MPC: Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.
Marginal propensity to consume = ΔC/ΔY where ΔC is the Change in consumption and ΔY is the change in income in the economy.

A schedule of the propensity to consume 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. A statement showing the functional relationship between the level of aggregate consumption and aggregate income at each level of income.

  2. A statement showing the functional relationship between the level of consumption and savings at each level of income.

  3. A statement showing the functional relationship between the level of aggregate consumption and investment at each level of income.

  4. none of the above

Show answer
Correct Option: A
Explanation:

A schedule of propensity to consume refers to a statement that shows the functional relationship between the level of aggregate consumption and aggregate income in the economy at each level of output produced. 

In dealing with Propensity to consume, Keynes considered two attributes: 
1. APC : APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. 

Average propensity to consume = C/Y where C is the consumption and Y is the income in the economy 

2. MPC : Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.
Marginal propensity to consume = ΔC/ΔY where ΔC is the Change in consumption and ΔY is the change in income in the economy.


$APC=\dfrac{C}{Y}$

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

Show answer
Correct Option: A
Explanation:

True.

 APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. 
Average propensity to consume = C/Y 
where C is the consumption and Y is the income in the economy.

Calculate APC:
If Y=$3,000$ and C=$2,600$.

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. 0.86

  2. 0.80

  3. 0.79

  4. 1.5

Show answer
Correct Option: A
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. 
Average propensity to consume = C/Y 
where C is the consumption and Y is the income in the economy 
If consumption is 2,600 and income is 3,000, then 
APC = C/Y
        = 2,600/3,000
        = 26/30 
        = 0.86 

Therefore, APC is 0.86. 

Psychological law of consumption states that "as income goes on increasing, the consumption also increases but at a rate less than increase in 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. True

  2. False

Show answer
Correct Option: A
Explanation:

True. 

J.M Keynes explained the relationship between Consumption(C) and Income(Y) through the psychological law of consumption that stated, "as income goes on increasing, the consumption also increases but at a rate less than increase in income because there is always a part of income which is saved for future uncertainties".