Unit 5: Consumption and Investment Function - Practice Quiz

ECO106 — Introduction To Economics 60 Questions
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1 What does the consumption function show?

Introduction to consumption function Easy
A. The relationship between income and consumption
B. The relationship between prices and exports
C. The relationship between taxes and imports
D. The relationship between savings and population

2 In the simple consumption function , what does represent?

Introduction to consumption function Easy
A. Total investment
B. Total saving
C. Total income
D. Total consumption

3 What does autonomous consumption mean?

Introduction to consumption function Easy
A. Consumption that occurs only after saving
B. Consumption equal to total investment
C. Consumption independent of current income
D. Consumption caused only by exports

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

Introduction to consumption function Easy
A. The change in income from a change in saving
B. The total amount of income spent on imports
C. The total amount of investment in an economy
D. The change in consumption from a change in income

5 If disposable income increases, consumption usually:

Introduction to consumption function Easy
A. Increases
B. Becomes zero
C. Remains unrelated
D. Decreases

6 Which factor is a major determinant of household consumption?

Determinants of consumption Easy
A. The size of the national flag
B. Disposable income
C. The color of currency notes
D. The number of national holidays

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

Determinants of consumption Easy
A. It prevents households from spending
B. It causes consumption to equal investment
C. It tends to increase consumption
D. It always eliminates consumption

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

Determinants of consumption Easy
A. They make borrowing costless
B. They always double borrowing
C. They tend to reduce borrowing
D. They have no possible effect

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

Determinants of consumption Easy
A. Consumption is certain to disappear
B. Consumption is forced to fall to zero
C. Consumption is likely to rise
D. Consumption must equal saving

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

Determinants of consumption Easy
A. Increase current consumption
B. Convert all income into taxes
C. Stop buying all goods
D. Reduce all household needs

11 In economics, investment mainly refers to:

Investment concepts and types Easy
A. Spending only on food
B. Paying personal transport fares
C. Spending on capital goods
D. Buying existing household clothes

12 Which is an example of fixed investment?

Investment concepts and types Easy
A. Purchasing office stationery
B. Buying lunch for workers
C. Paying a monthly electricity bill
D. Purchasing a factory machine

13 What is inventory investment?

Investment concepts and types Easy
A. A change in the amount of money printed
B. A change in the number of household members
C. A change in the national tax rate
D. A change in stocks of goods held by firms

14 Which investment increases the productive capacity of an economy?

Investment concepts and types Easy
A. Purchase of entertainment tickets
B. Payment for household meals
C. Purchase of used clothing
D. Investment in new machinery

15 What is residential investment?

Investment concepts and types Easy
A. Spending on daily bus tickets
B. Spending on new houses and apartments
C. Spending on imported consumer food
D. Spending on government salaries

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

Determinants of investment Easy
A. The national anthem
B. The number of weekends
C. The interest rate
D. The weather forecast

17 An increase in expected business profits will usually:

Determinants of investment Easy
A. Prevent firms from expanding
B. Eliminate the need for capital
C. Make all investment impossible
D. Encourage more investment

18 When firms have unused production capacity, they may:

Determinants of investment Easy
A. Increase investment without limits
B. Stop considering production costs
C. Always build more factories
D. Reduce new investment

19 How does consumption support economic growth?

Role of consumption and investment in economic growth and business expansion Easy
A. It removes all business activity
B. It prevents firms from hiring workers
C. It creates demand for goods and services
D. It reduces the need for production

20 How does investment contribute to business expansion?

Role of consumption and investment in economic growth and business expansion Easy
A. It increases productive capacity
B. It reduces the number of available machines
C. It eliminates the need for workers
D. It stops firms from adopting technology

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

Introduction to consumption function Medium
A.
B.
C.
D.

22 In the consumption function , what does represent?

Introduction to consumption function Medium
A. Average saving
B. Autonomous consumption
C. Disposable income
D. Induced investment

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

Introduction to consumption function Medium
A.
B.
C.
D.

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

Introduction to consumption function Medium
A.
B.
C.
D.

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

Determinants of consumption Medium
A. A fall in household wealth
B. A rise in household wealth
C. A fall in consumer confidence
D. A rise in unemployment

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

Determinants of consumption Medium
A. Makes credit-financed purchases cheaper
B. Reduces households' disposable income
C. Encourages saving over spending
D. Raises the cost of borrowing

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

Determinants of consumption Medium
A. Consumption will equal investment
B. Consumption will increase sharply
C. Consumption will remain unchanged
D. Consumption will decrease

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

Determinants of consumption Medium
A. Disposable income falls and consumption rises
B. Both disposable income and consumption fall
C. Disposable income and consumption rise
D. Disposable income rises and consumption falls

29 Which example is classified as real investment in macroeconomics?

Investment concepts and types Medium
A. Buying shares from another investor
B. Holding cash in a bank account
C. Purchasing a newly built machine
D. Buying an existing government bond

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

Investment concepts and types Medium
A. Replacement investment
B. Inventory investment
C. Autonomous consumption
D. Net investment

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

Investment concepts and types Medium
A. million
B. million
C. million
D. million

32 Which situation is an example of inventory investment?

Investment concepts and types Medium
A. A firm buys a new delivery truck
B. A retailer's unsold stock rises unexpectedly
C. A bank lowers its lending rate
D. A household purchases a bond

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

Determinants of investment Medium
A. Becomes unrelated to costs
B. Falls below the interest rate
C. Equals zero
D. Exceeds the interest rate

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

Determinants of investment Medium
A. Eliminates depreciation
B. Increases the productivity of capital
C. Raises the cost of financing
D. Raises expected sales automatically

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

Determinants of investment Medium
A. Reduce productive capacity
B. Lower expected sales
C. Increase investment in capacity
D. Stop replacing machinery

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

Determinants of investment Medium
A. Improved business confidence
B. Higher expected profitability
C. Greater political uncertainty
D. Stronger consumer demand

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

Role of consumption and investment in economic growth and business expansion Medium
A. It reduces aggregate demand
B. It eliminates the need for investment
C. It raises demand for firms' output
D. It lowers employment automatically

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

Role of consumption and investment in economic growth and business expansion Medium
A. It prevents technological change
B. It expands productive capacity
C. It always reduces employment
D. It replaces all consumption

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

Role of consumption and investment in economic growth and business expansion Medium
A. Aggregate demand may weaken
B. Imports must become zero
C. Consumption must increase
D. Potential output must immediately rise

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

Role of consumption and investment in economic growth and business expansion Medium
A. Increasing output per worker
B. Lowering the value of capital
C. Reducing productive capacity
D. Eliminating market demand

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

Introduction to consumption function Hard
A. Consumption rises by , and APC remains constant
B. Consumption rises by , and APC falls
C. Consumption rises by , and APC rises
D. Consumption rises by , and APC falls

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?

Introduction to consumption function Hard
A.
B.
C. after tax adjustment is ignored
D.

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?

Introduction to consumption function Hard
A. The expenditure multiplier is
B. The saving rate is
C. The marginal propensity to consume is
D. The expenditure multiplier is

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

Introduction to consumption function Hard
A.
B.
C.
D.

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?

Determinants of consumption Hard
A. No consumption difference because current income is identical
B. A higher marginal propensity to save in Economy A necessarily
C. A lower consumption intercept in Economy A
D. A higher consumption intercept in Economy A

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

Determinants of consumption Hard
A. Consumption must rise because borrowing becomes cheaper
B. Consumption may fall despite the lower interest rate
C. Consumption is unaffected because interest rates never matter
D. Consumption rises only if disposable income immediately doubles

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?

Determinants of consumption Hard
A. Both policies, because their fiscal costs are identical
B. The permanent reduction, because expected lifetime resources rise more
C. Neither policy, because taxes do not affect consumption
D. The temporary rebate, because all transfers are consumed immediately

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?

Determinants of consumption Hard
A. Aggregate consumption remains unchanged by construction
B. Aggregate consumption and saving both increase
C. Aggregate consumption increases and saving falls
D. Aggregate consumption decreases and saving rises

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

Determinants of consumption Hard
A. It reduces consumption because unrealized gains are taxable
B. It necessarily increases consumption by the full asset value
C. It cannot affect consumption unless the asset is sold
D. It may increase consumption through perceived wealth

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?

Investment concepts and types Hard
A. Gross fixed business investment
B. Inventory investment
C. Financial investment, not current real investment
D. Residential investment

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?

Investment concepts and types Hard
A. Gross investment million; net investment million
B. Gross investment million; net investment million
C. Gross investment million; net investment million
D. Gross investment million; net investment million

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

Investment concepts and types Hard
A. Unplanned positive inventory investment
B. Planned positive inventory investment
C. Planned negative inventory investment
D. Disinvestment in fixed capital

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

Investment concepts and types Hard
A. It is induced investment only when sales increase
B. It is replacement investment and may still raise productivity
C. It is inventory investment because output is unchanged
D. It is purely financial investment because capacity is unchanged

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

Investment concepts and types Hard
A. Depreciation of domestically owned capital
B. Transfer payment financed by foreign savings
C. Foreign direct investment that adds to domestic productive capacity
D. Portfolio investment with no effect on domestic production

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?

Determinants of investment Hard
A. Reject, because all investment requires a return above $10\%
B. Reject, because the risk-adjusted required return is
C. Accept, because the market interest rate is below the return
D. Accept, because inflation always lowers the real cost

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?

Determinants of investment Hard
A. Investment may rise because desired capital stock increases
B. Investment rises only if depreciation becomes zero
C. Investment must fall because current sales are unchanged
D. Investment is unchanged because only interest rates matter

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?

Determinants of investment Hard
A. Investment is unaffected because capital costs never matter
B. Investment may respond weakly because demand expectations constrain it
C. Investment must increase by the full value of the tax credit
D. Investment must fall because tax credits reduce tax revenue

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?

Determinants of investment Hard
A. Investment tends to decrease because equity is overvalued
B. Investment becomes negative whenever exceeds one
C. Investment is unchanged because measures liquidity only
D. Investment tends to increase because new capital is relatively attractive

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?

Role of consumption and investment in economic growth and business expansion Hard
A. Growth must accelerate if the saving rate exceeds the depreciation rate
B. Growth may weaken because forgone consumption produced little productive capacity
C. Growth must accelerate because investment rose
D. Growth is unaffected because consumption never influences output

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?

Role of consumption and investment in economic growth and business expansion Hard
A. Investment rises because household saving always finances expansion
B. A larger saving rate automatically guarantees higher current output
C. Consumption rises because precautionary saving increases income
D. Aggregate demand may contract through mutually reinforcing effects