Correct Answer: The relationship between income and consumption
Explanation:
The consumption function describes how consumption changes as income changes.
Incorrect! Try again.
2In the simple consumption function , what does represent?
Introduction to consumption function
Easy
A.Total investment
B.Total saving
C.Total income
D.Total consumption
Correct Answer: Total consumption
Explanation:
In the equation , denotes total consumption expenditure.
Incorrect! Try again.
3What 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
Correct Answer: Consumption independent of current income
Explanation:
Autonomous consumption occurs even when current income is zero, often because of borrowing or past savings.
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4What 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
Correct Answer: The change in consumption from a change in income
Explanation:
MPC measures the change in consumption resulting from a change in disposable income.
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5If disposable income increases, consumption usually:
Introduction to consumption function
Easy
A.Increases
B.Becomes zero
C.Remains unrelated
D.Decreases
Correct Answer: Increases
Explanation:
People generally spend more when their disposable income rises.
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6Which 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
Correct Answer: Disposable income
Explanation:
Disposable income affects the amount households can spend on goods and services.
Incorrect! Try again.
7How 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
Correct Answer: It tends to increase consumption
Explanation:
Households with greater wealth may feel more financially secure and increase their spending.
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8How 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
Correct Answer: They tend to reduce borrowing
Explanation:
Higher interest rates increase the cost of loans, which may reduce borrowing and consumption.
Incorrect! Try again.
9What 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
Correct Answer: Consumption is likely to rise
Explanation:
Confident consumers are more willing to spend because they expect their financial situation to remain stable.
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10If 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
Correct Answer: Increase current consumption
Explanation:
Positive expectations about future income can encourage people to spend more today.
Incorrect! Try again.
11In 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
Correct Answer: Spending on capital goods
Explanation:
Economic investment involves spending on capital goods such as machinery, buildings, and equipment.
Incorrect! Try again.
12Which 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
Correct Answer: Purchasing a factory machine
Explanation:
Fixed investment adds to the stock of long-lasting capital goods, such as factory machinery.
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13What 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
Correct Answer: A change in stocks of goods held by firms
Explanation:
Inventory investment is the increase or decrease in goods that firms keep in stock.
Incorrect! Try again.
14Which 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
Correct Answer: Investment in new machinery
Explanation:
New machinery helps firms produce more goods and services, increasing productive capacity.
Incorrect! Try again.
15What 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
Correct Answer: Spending on new houses and apartments
Explanation:
Residential investment includes expenditure on newly constructed homes and other residential buildings.
Incorrect! Try again.
16Which 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
Correct Answer: The interest rate
Explanation:
Interest rates affect the cost of loans used to finance investment projects.
Incorrect! Try again.
17An 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
Correct Answer: Encourage more investment
Explanation:
Higher expected profits make investment projects more attractive to firms.
Incorrect! Try again.
18When 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
Correct Answer: Reduce new investment
Explanation:
Firms with unused capacity may meet higher demand without purchasing additional capital goods.
Incorrect! Try again.
19How 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
Correct Answer: It creates demand for goods and services
Explanation:
Consumption provides demand that encourages firms to produce goods and services.
Incorrect! Try again.
20How 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
Correct Answer: It increases productive capacity
Explanation:
Investment in machinery, buildings, and technology enables firms to produce more.
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21If the consumption function is , what is consumption when disposable income is ?
Introduction to consumption function
Medium
A.
B.
C.
D.
Correct Answer:
Explanation:
Substitute : .
Incorrect! Try again.
22In the consumption function , what does represent?
Introduction to consumption function
Medium
A.Average saving
B.Autonomous consumption
C.Disposable income
D.Induced investment
Correct Answer: Autonomous consumption
Explanation:
represents consumption that occurs even when disposable income is zero.
Incorrect! Try again.
23A 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.
Correct Answer:
Explanation:
The marginal propensity to consume is .
Incorrect! Try again.
24If the marginal propensity to consume is , what is the marginal propensity to save?
Introduction to consumption function
Medium
A.
B.
C.
D.
Correct Answer:
Explanation:
Since income is either consumed or saved, .
Incorrect! Try again.
25Which 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
Correct Answer: A rise in household wealth
Explanation:
Higher wealth improves households' ability and willingness to spend, shifting consumption upward.
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26A 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
Correct Answer: Makes credit-financed purchases cheaper
Explanation:
Lower interest rates reduce borrowing costs and can encourage households to purchase durable goods.
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27If 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
Correct Answer: Consumption will decrease
Explanation:
Expectations of lower future income often cause households to reduce current spending and increase precautionary saving.
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28A 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
Correct Answer: Disposable income and consumption rise
Explanation:
Lower taxes increase disposable income. With the same saving behavior, part of the additional income is spent.
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29Which 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
Correct Answer: Purchasing a newly built machine
Explanation:
Real investment adds to the economy's productive capital, such as machinery, equipment, and structures.
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30A 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
Correct Answer: Replacement investment
Explanation:
Replacement investment maintains existing productive capacity but does not increase the capital stock.
Incorrect! Try again.
31If 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
Correct Answer: million
Explanation:
Net investment equals gross investment minus depreciation: million.
Incorrect! Try again.
32Which 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
Correct Answer: A retailer's unsold stock rises unexpectedly
Explanation:
Inventory investment occurs when firms accumulate goods that have not yet been sold.
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33A 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
Correct Answer: Exceeds the interest rate
Explanation:
Investment is attractive when the expected return is greater than the cost of borrowing or financing.
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34An 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
Correct Answer: Raises the cost of financing
Explanation:
Higher interest rates make borrowing more expensive and reduce the number of profitable investment projects.
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35Under 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
Correct Answer: Increase investment in capacity
Explanation:
Growing demand encourages firms to expand productive capacity, leading to higher induced investment.
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36Which 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
Correct Answer: Greater political uncertainty
Explanation:
Political uncertainty increases perceived risk and may cause firms to postpone or cancel investment plans.
Incorrect! Try again.
37Why 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
Correct Answer: It raises demand for firms' output
Explanation:
Higher consumption increases aggregate demand, encouraging firms to produce more and hire additional workers.
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38Why 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
Correct Answer: It expands productive capacity
Explanation:
Investment increases the capital stock and can introduce better technology, raising future productive capacity.
Incorrect! Try again.
39If 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
Correct Answer: Aggregate demand may weaken
Explanation:
A rise in saving can reduce current consumption. Without additional investment, total spending and output may decline.
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40A 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
Correct Answer: Increasing output per worker
Explanation:
Automation can raise labor productivity, reduce unit costs, and allow the firm to produce more efficiently.
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41An 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
Correct Answer: Consumption rises by , and APC falls
Explanation:
The marginal propensity to consume is , so consumption rises by . Since autonomous consumption is positive, the average propensity to consume falls as income increases.
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42Suppose 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.
Correct Answer:
Explanation:
Disposable income is . Therefore, .
Incorrect! Try again.
43In 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
Correct Answer: The expenditure multiplier is
Explanation:
The multiplier is . Thus, the initial increase of produces an income increase of .
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44A 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.
Correct Answer:
Explanation:
Set : . Hence, , giving .
Incorrect! Try again.
45Two 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
Correct Answer: A higher consumption intercept in Economy A
Explanation:
Greater wealth can raise consumption at every current income level, shifting the consumption function upward without necessarily changing its slope.
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46A 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
Correct Answer: Consumption may fall despite the lower interest rate
Explanation:
Interest rates influence consumption, but expectations, wealth, and precautionary saving can dominate. Pessimistic expectations may reduce current consumption despite cheaper credit.
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47A 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
Correct Answer: The permanent reduction, because expected lifetime resources rise more
Explanation:
If households base consumption partly on expected lifetime income, a permanent tax reduction raises perceived long-term resources more than a temporary rebate.
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48A 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
Correct Answer: Aggregate consumption decreases and saving rises
Explanation:
Redistribution toward lower-MPC households reduces aggregate consumption because an additional unit of income generates less consumption, increasing aggregate saving.
Incorrect! Try again.
49A 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
Correct Answer: It may increase consumption through perceived wealth
Explanation:
Unrealized capital gains can raise perceived wealth and relax borrowing constraints, although the response is usually smaller and less certain than the gain itself.
Incorrect! Try again.
50A 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
Correct Answer: Financial investment, not current real investment
Explanation:
The purchase transfers ownership of an existing financial asset. It does not directly create new productive capital and is therefore not counted as current real investment.
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51A 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
Correct Answer: Gross investment million; net investment million
Explanation:
Gross investment includes all new capital purchases. Net investment subtracts depreciation: million.
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52A firm increases its inventories because expected sales unexpectedly decline. Which classification is most accurate?
Unsold goods accumulate when actual sales are below expectations. The resulting inventory increase is positive but unplanned.
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53A 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
Correct Answer: It is replacement investment and may still raise productivity
Explanation:
Replacement investment maintains the capital stock, but technological improvement can reduce costs or increase productivity even without expanding capacity.
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54A 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
Correct Answer: Foreign direct investment that adds to domestic productive capacity
Explanation:
A newly constructed foreign-controlled facility is foreign direct investment and contributes to the host economy's real capital stock.
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55A 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
Correct Answer: Reject, because the risk-adjusted required return is $8\%
Explanation:
The effective hurdle rate is . Since the expected return is only , the project does not meet the risk-adjusted requirement.
Incorrect! Try again.
56A 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
Correct Answer: Investment may rise because desired capital stock increases
Explanation:
Higher expected output can increase the desired capital stock. Firms may invest before current sales rise if they anticipate stronger future demand.
Incorrect! Try again.
57A 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
Correct Answer: Investment may respond weakly because demand expectations constrain it
Explanation:
Lower capital costs encourage investment, but firms with unused capacity and poor demand expectations may have little reason to expand capital.
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58An 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
Correct Answer: Investment tends to increase because new capital is relatively attractive
Explanation:
When exceeds one, the market valuation of installed capital is high relative to replacement cost, encouraging firms to create additional capital.
Incorrect! Try again.
59An 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
Correct Answer: Growth may weaken because forgone consumption produced little productive capacity
Explanation:
Investment supports growth only when it creates productive capacity or raises productivity. Sacrificing consumption for inefficient investment can reduce welfare and future output.
Incorrect! Try again.
60During 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
Correct Answer: Aggregate demand may contract through mutually reinforcing effects
Explanation:
Higher saving reduces consumption, while weak demand reduces investment. Together they can lower aggregate demand, income, and employment in the short run.
Incorrect! Try again.
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