Tag: concept of consumption function, saving function and investment function

Questions Related to concept of consumption function, saving function and investment function

If MPC = MPS, then value of multiplier 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

  2. One

  3. Equal to MPC

  4. Two

Show answer
Correct Option: D
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/ MPS(s) where s is the marginal propensity to save. 


So if MPS=MPC then ,

We know that MPC + MPS =1 

=> 2 MPS= 1 

=> MPS= 1/2 

=> MPS= 0.5  

Multiplier (K) = 1/ MPS= 2 times.

Hence, the value of the multiplier is two. 

If MPC = 0, the value of multiplier 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. 0

  2. 1

  3. Between 0 and 1

  4. Infinity

Show answer
Correct Option: B
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.

If MPC = 0, then 

Multiplier(k)= 1/(1-0)= 1/1 = 1

Therefore, the value of the multiplier is 1. 

If MPS = 0.20 and investment is increased by Rs. 400 crores, then total Increase in income will be: 

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. 80 crores

  2. Rs. 2,000 crores

  3. Rs. 500 crores

  4. Rs. 3,200 crores

Show answer
Correct Option: D
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/ MPS(s) where s is the marginal propensity to save. 

If MPS= 0.20 and change in investment is by Rs. 400 crores, then 

Multiplier(k) => Change in income / change in investment = 1/ MPS 

                     => change in income/ 400 = 1/0.20

                     => change in income/ 400 = 5

                     => change in income = 5 * 400 = 2000 crores. 


Therefore, Income is increased by Rs. 2000 crores. 


 If the marginal propensity of consume is greater than marginal propensity to save, the value of the multiplier will be (Choose the correct alternative): 

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. greater than 2

  2. less than 2

  3. equal to 2

  4. equal to 5

Show answer
Correct Option: A
Explanation:

If the value of MPC IS greater than MPS, then the value of the multiplier is always more than two because the change in savings or investment will always be less than half the change in income. 

When is the disposable income equal to the total 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. When taxes are equal to zero.

  2. When taxes are equal to the income.

  3. When taxes are equal to the fines payable.

  4. When taxes and fines payable are equal to zero.

Show answer
Correct Option: D
Explanation:

Disposable income and total income will be the same if tax payment and fines payable are non existing or zero.

Disposable income is that part of total income which is available for consumption and saving. To elaborate it further, note that when a person receives income in return of factor services rendered by him/her, he/she may not spend all the income on consumption only. There are certain compulsory payments he/she has to make out of the income received, such as tax to the government, fines, if any etc. As a result the income available for consumption needs is reduced. Disposable income is defined as the income remained after payment of tax and fines. If tax payment is high, disposable income will be lower and vice versa. Accordingly, the level of consumption will be affected.

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

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. 0.1

  3. 0.2 for time period 1 and 0.1 for time period 2.

  4. 0.1 for time period 1 and 0.2 for time period 2.

Show answer
Correct Option: A
Explanation:

MPS = (Change in savings)/(Change in Income),

So, 

MPS = (600-900)/(4500-3000)
 = 300/1500
 = 0.2

The Keynesian consumption function gives the relationship between consumption and _______________.

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. level of investments.

  2. level of savings.

  3. level of income.

  4. level of capital formation.

Show answer
Correct Option: C
Explanation:

The relationship between consumption and the level of income is called consumption function. Consumption function tells that consumption is a function of income, or in other words, consumption depends on the level of income.

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. In the same way, it can also be said that economy with higher level of national income consumes more than the economy which has lower level of national income.

If consumption is Rs 300 Cr. and income is Rs 300 crore, what is APC and what does this imply?

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. 1 and it implies that on an average 100 per cent of the total income has been spent on consumption.

  2. 0.5 and it implies that on an average 50 per cent of the total income will be spent on consumption.

  3. 1 and it implies that on an average 100 per cent of the total income has been spent on saving.

  4. 0.5 and it implies that on an average 50 per cent of the total income will be spent on saving.

Show answer
Correct Option: A
Explanation:

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

where, C = consumption 
and Y = income

Hence, APC = $\dfrac{300}{300}$ $= 1$

This implies that on an average 100 per cent of the total income has been spent on consumption.

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