Unit 5: Consumption and Investment Function - Practice Quiz

1 What does the consumption function show?

2 In the simple consumption function , what does represent?

3 What does autonomous consumption mean?

4 What is the marginal propensity to consume (MPC)?

5 If disposable income increases, consumption usually:

6 Which factor is a major determinant of household consumption?

7 How does an increase in household wealth generally affect consumption?

8 How do higher interest rates commonly affect borrowing for consumption?

9 What is the likely effect of greater consumer confidence on consumption?

10 If people expect their future income to increase, they may:

11 In economics, investment mainly refers to:

12 Which is an example of fixed investment?

13 What is inventory investment?

14 Which investment increases the productive capacity of an economy?

15 What is residential investment?

16 Which factor directly affects the cost of borrowing for investment?

17 An increase in expected business profits will usually:

18 When firms have unused production capacity, they may:

19 How does consumption support economic growth?

20 How does investment contribute to business expansion?

21 If the consumption function is , what is consumption when disposable income is ?

22 In the consumption function , what does represent?

23 A household's disposable income rises from to , while consumption rises from to . What is the marginal propensity to consume?

24 If the marginal propensity to consume is , what is the marginal propensity to save?

25 Which change would most likely increase consumption without an immediate change in current income?

26 A decrease in interest rates is most likely to increase consumption because it:

27 If consumers expect their future incomes to fall, what is the most likely short-run effect on current consumption?

28 A government reduces personal income taxes while households maintain the same saving behavior. What is the likely effect?

29 Which example is classified as real investment in macroeconomics?

30 A firm replaces an old machine with a new one while keeping its total capital stock unchanged. This is best described as:

31 If gross investment is million and depreciation is million, what is net investment?

32 Which situation is an example of inventory investment?

33 A firm is most likely to increase investment when the expected rate of return on a project:

34 An increase in the interest rate will generally reduce planned investment because it:

35 Under the accelerator principle, a sustained increase in consumer demand is likely to cause firms to:

36 Which factor would most likely discourage private investment even if interest rates remain unchanged?

37 Why can increased consumption contribute to short-run economic growth?

38 Why is investment especially important for long-run economic growth?

39 If households save more but firms do not increase investment, what short-run effect may occur?

40 A firm's investment in automated equipment is most likely to promote business expansion by:

41 An economy has the consumption function . If disposable income rises from to , which statement is correct?

42 Suppose the consumption function is , but households pay a lump-sum tax of . If national income is and there are no transfers, what is consumption?

43 In a simple Keynesian model, the marginal propensity to consume is . A permanent increase in autonomous consumption of raises equilibrium income by . Which conclusion follows?

44 A household's consumption function is . At what disposable income is average propensity to consume equal to ?

45 Two economies have identical current disposable incomes and identical marginal propensities to consume. Economy A has substantially greater household wealth because of a housing-price boom. Which short-run outcome is most consistent with the wealth effect?

46 A central bank reduces interest rates, but households expect prolonged unemployment and falling house prices. Which result is most defensible?

47 A temporary tax rebate and a permanent tax reduction have the same total fiscal cost. Under forward-looking consumption behavior, which policy is more likely to generate the larger immediate consumption response?

48 A rise in income inequality shifts income toward households with a lower marginal propensity to consume. Holding total income constant, what is the most likely aggregate effect?

49 A household receives a large capital gain on an asset but does not sell it. Which statement best captures its potential consumption effect?

50 A firm purchases shares issued by another company in a stock-market transaction. From a macroeconomic national-income perspective, how should this transaction usually be classified?

51 A firm's capital stock is valued at million at the beginning of the year. During the year it purchases million of new equipment and depreciation is million. What are gross and net investment?

52 A firm increases its inventories because expected sales unexpectedly decline. Which classification is most accurate?

53 A project replaces an old machine with a more energy-efficient machine but leaves productive capacity unchanged. Which statement is most accurate?

54 A foreign firm builds and operates a new factory in the domestic economy, while retaining managerial control. Which description best fits the activity?

55 A project yields an expected annual return of . Its real cost of borrowing is , but uncertainty raises the required risk premium to . Ignoring taxes, what is the most likely decision?

56 A permanent increase in expected future sales occurs while the current interest rate remains unchanged. According to the accelerator perspective, what is the most likely effect?

57 A tax credit reduces the user cost of capital, but firms face severe excess capacity and expect weak demand. Which conclusion is most appropriate?

58 An increase in the market value of a firm relative to the replacement cost of its capital raises its ratio. What investment response does Tobin's theory predict?

59 An economy reduces current consumption substantially to finance higher investment, but the new capital is poorly allocated and productivity does not improve. Which conclusion is strongest?

60 During a recession, households sharply increase saving while firms reduce investment because expected demand is weak. What is the likely short-run macroeconomic consequence?