Tag: consumption and investment functions

Questions Related to consumption and investment functions

The Average Propensity to Consume is denoted as _____________.

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. $APC=\dfrac{C}{I}$

  2. $APC=\dfrac{S}{Y}$

  3. $APC=\dfrac{I}{Y}$

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

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Correct Option: D
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.

_______________ explains the relationship between Consumption (C) and Income (Y) in terms of the psychological law 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. Alfred Marshall

  2. J.M. Keynes

  3. Adam Smith

  4. Lionel Robbins

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Correct Option: B
Explanation:

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". 

___________________ is consumption at zero level of 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. Direct consumption

  2. Autonomous consumption

  3. Indirect consumption

  4. Induced consumption

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Correct Option: B
Explanation:

Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy due to the requirement of the basic needs of life. 

Marginal Propensity to Consume is denoted as ___________________.

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. $MPC=\dfrac {\triangle C}{\triangle Y}$

  2. $MPC=\dfrac {\triangle C}{\triangle S}$

  3. $MPC=\dfrac {\triangle C}{\triangle I}$

  4. $MPC=\dfrac {\triangle I}{\triangle Y}$

Show answer
Correct Option: A
Explanation:
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.

Marginal propensity to consume refers to the effect of additional income on 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. True

  2. False

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Correct Option: A

How is marginal propensity to consumed expressed mathematically?

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 = c (Y 0) = c.Y

  2. C = c (Y 0) = I-K

  3. C = c (I Y) = c.Y

  4. C = c (Y 0) k

Show answer
Correct Option: A
Explanation:

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.

Mathematically, 

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

Therefore, marginal propensity to consume is expressed as a product with the income earned by the economy. 


Higher level of current consumption means ___________.

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. higher economic growth in future

  2. slower economic growth in future

  3. higher capital formation in future

  4. no change in growth rate

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Correct Option: B
Explanation:

Resources are scarce in nature, so if it will be consumed in large amount then future generation will not be able to meet their needs and it will result in slower economic growth. 

As income is either consumed or invested, therefore if the consumption is greater than the investment then the proportion of income invested will be less which will hamper the future income and which will again decrease the investment that will ultimately result in slower economic growth in future. 

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 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. Zero

  2. Rs 30 Crore

  3. Rs 700 crore

  4. Rs 350 crore

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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 = -700 + (1- 0.8) x 3500 = 0.

Level of savings = 0

The formula for the 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. the change in consumption divided by the change in income

  2. consumption divided by income

  3. consumption plus saving divided by income

  4. the change in income divided by the change in consumption.

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: $MPC=\dfrac{\text{Change in consumption}}{\text{Change in income}}$

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 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 1750 crore

  2. Rs 750 crore

  3. Rs 1250 crore

  4. Rs 2250 crore

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Correct Option: B
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 

S = -500 + (1- 0.5) x 2500 = 750.

Level of savings = Rs. 750 crore.