1The functional relationship between aggregate consumption expenditure and aggregate income is known as:
A.Aggregate Demand Function
B.Consumption Function
C.Investment Function
D.Supply Function
Correct Answer: Consumption Function
Explanation:The consumption function expresses the functional relationship between aggregate consumption and national income, typically denoted as .
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2In the linear consumption function , what does the coefficient '' represent?
A.Marginal Propensity to Consume
B.Induced Consumption
C.Autonomous Consumption
D.Average Propensity to Consume
Correct Answer: Autonomous Consumption
Explanation:In the equation , '' represents autonomous consumption, which is the level of consumption when income () is zero.
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3What is the value of the Marginal Propensity to Consume (MPC) usually assumed to be in Keynesian economics?
A.Greater than 1
B.Less than 0
C.Between 0 and 1
D.Equal to 1
Correct Answer: Between 0 and 1
Explanation:According to Keynes' Psychological Law of Consumption, as income increases, consumption increases but not by as much as the increase in income. Therefore, .
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4The Marginal Propensity to Consume (MPC) is defined as:
A.Total Consumption / Total Income
B.Change in Consumption / Change in Income
C.Change in Income / Change in Consumption
D.Total Income / Total Consumption
Correct Answer: Change in Consumption / Change in Income
Explanation:MPC measures the rate of change in consumption due to a change in income, mathematically expressed as .
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5If the Marginal Propensity to Consume (MPC) is 0.8, what is the Marginal Propensity to Save (MPS)?
A.0.2
B.0.8
C.1.2
D.0.5
Correct Answer: 0.2
Explanation:Since income is either consumed or saved, . Therefore, .
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6The point at which the consumption curve intersects the 45-degree line (where ) is called the:
A.Equilibrium Point
B.Saturation Point
C.Break-even Point
D.Autonomous Point
Correct Answer: Break-even Point
Explanation:At the break-even point, consumption expenditure equals income (), meaning savings are zero.
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7Which of the following is an objective factor determining consumption?
A.Expectation of future needs
B.Desire for precaution
C.Changes in the interest rate
D.Miserliness
Correct Answer: Changes in the interest rate
Explanation:Objective factors are external economic variables (like interest rates, wage levels, fiscal policy). Expectations, precaution, and miserliness are subjective psychological factors.
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8Investment that is independent of the level of income is known as:
A.Induced Investment
B.Net Investment
C.Autonomous Investment
D.Gross Investment
Correct Answer: Autonomous Investment
Explanation:Autonomous investment is determined by exogenous factors like population growth or technology, not by the current level of income. Its curve is horizontal.
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9The ratio of total consumption to total income at a specific level of income is called:
A.Marginal Propensity to Consume (MPC)
B.Average Propensity to Consume (APC)
C.Marginal Propensity to Save (MPS)
D.Average Propensity to Save (APS)
Correct Answer: Average Propensity to Consume (APC)
Explanation:APC is the ratio of total consumption to total income, calculated as .
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10According to Keynes, as income increases, the Average Propensity to Consume (APC):
A.Increases
B.Remains constant
C.Decreases
D.Becomes negative
Correct Answer: Decreases
Explanation:As income rises, the proportion of income spent on consumption declines because basic needs are satisfied, leading to a fall in APC.
Explanation:Gross investment includes expenditure on new capital assets plus expenditure on replacement of worn-out capital (depreciation). Therefore, .
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12The 'Ratchet Effect' in consumption theory is associated with which hypothesis?
A.Absolute Income Hypothesis
B.Relative Income Hypothesis
C.Permanent Income Hypothesis
D.Life Cycle Hypothesis
Correct Answer: Relative Income Hypothesis
Explanation:The Ratchet Effect, proposed by Duesenberry in the Relative Income Hypothesis, suggests that when income falls, consumption does not fall proportionately because people try to maintain their previous standard of living.
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13Investment that depends on the profit expectations resulting from changes in the level of income is called:
A.Autonomous Investment
B.Induced Investment
C.Public Investment
D.Real Investment
Correct Answer: Induced Investment
Explanation:Induced investment is positively related to income and demand. As income grows, demand grows, increasing profitability and inducing investment.
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14Which concept represents the expected rate of return on a new capital asset?
A.Marginal Propensity to Invest
B.Marginal Efficiency of Capital (MEC)
C.Internal Rate of Savings
D.Capital Output Ratio
Correct Answer: Marginal Efficiency of Capital (MEC)
Explanation:MEC refers to the expected profitability of an additional unit of capital asset. It is the discount rate that equates the supply price of an asset with its prospective yield.
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15A business will invest in a new project if:
A.MEC < Market Interest Rate
B.MEC = Market Interest Rate
C.MEC > Market Interest Rate
D.MEC is zero
Correct Answer: MEC > Market Interest Rate
Explanation:Rational investors invest only if the expected return (MEC) exceeds the cost of borrowing (Interest Rate).
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16In the consumption equation , what is the value of the multiplier ()?
A.2
B.3
C.4
D.5
Correct Answer: 4
Explanation:The multiplier is calculated as . Here . So, .
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17Which of the following is NOT a determinant of the Marginal Efficiency of Capital (MEC)?
A.Supply Price of the asset
B.Prospective Yield
C.Propensity to Consume
D.Market Interest Rate expectations
Correct Answer: Propensity to Consume
Explanation:MEC is determined by the supply price (cost) of the asset and its prospective yield (expected returns). While consumption affects demand, it is not a direct component of the MEC calculation itself.
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18The 'Demonstration Effect', where individuals mimic the consumption patterns of higher-income groups, was introduced by:
A.J.M. Keynes
B.Milton Friedman
C.James Duesenberry
D.Franco Modigliani
Correct Answer: James Duesenberry
Explanation:James Duesenberry introduced the Demonstration Effect as part of the Relative Income Hypothesis.
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19If the Average Propensity to Save (APS) is negative, this implies:
A.Income > Consumption
B.Consumption > Income
C.Savings are zero
D.Investment is negative
Correct Answer: Consumption > Income
Explanation:APS is . If APS is negative, Savings () must be negative (dissaving). This occurs when Consumption () exceeds Income ().
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20The summation of APC and APS always equals:
A.
B.0.5
C.1
D.Infinity
Correct Answer: 1
Explanation:Since , dividing by gives . Therefore, .
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21Which of the following describes the 'Supply Price' in the context of investment?
A.The price at which goods are sold
B.The cost of replacing the capital asset with a new one
C.The interest rate on loans
D.The expected profit
Correct Answer: The cost of replacing the capital asset with a new one
Explanation:Supply price refers to the current replacement cost of a capital asset, not the price of the product produced by it.
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22The Permanent Income Hypothesis was formulated by:
A.Keynes
B.Friedman
C.Kuznets
D.Tobin
Correct Answer: Friedman
Explanation:Milton Friedman proposed the Permanent Income Hypothesis, suggesting consumption depends on long-term expected income (permanent income) rather than current income.
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23Technological advancement generally shifts the MEC curve to the:
A.Left
B.Right
C.Downwards
D.Does not shift
Correct Answer: Right
Explanation:Technological advancements usually reduce costs or create new products, increasing prospective yields, thus shifting the MEC curve to the right (increasing investment demand).
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24Which form of investment adds to the real capital stock of the economy?
A.Buying shares of an existing company
B.Buying a second-hand machine
C.Buying existing bonds
D.Construction of a new factory
Correct Answer: Construction of a new factory
Explanation:Buying shares or second-hand goods involves a transfer of ownership (financial investment). Constructing a new factory is Real Investment as it creates new productive capacity.
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25Which factor has an inverse relationship with investment?
A.Technological progress
B.Business confidence
C.Rate of Interest
D.Economic Growth
Correct Answer: Rate of Interest
Explanation:The rate of interest is the cost of capital. When interest rates rise, the cost of borrowing increases, and investment generally falls. Thus, there is an inverse relationship.
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26If , the value of the investment multiplier is:
A.
B.1
C.Infinity
D.Undefined
Correct Answer: 1
Explanation:Multiplier . If , .
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27Which of the following is considered a 'leakage' from the circular flow of income?
A.Investment
B.Exports
C.Savings
D.Government Spending
Correct Answer: Savings
Explanation:Savings represent income withdrawn from the circular flow of consumption, acting as a leakage.
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28The slope of the consumption function curve represents:
A.APC
B.APS
C.MPC
D.MPS
Correct Answer: MPC
Explanation:The slope of the line plotting Consumption () against Income () is , which is the definition of the Marginal Propensity to Consume (MPC).
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29Inventory investment is defined as:
A.Investment in stocks and bonds
B.Change in the stock of raw materials, semi-finished, and finished goods
C.Purchase of machinery
D.Building new infrastructure
Correct Answer: Change in the stock of raw materials, semi-finished, and finished goods
Explanation:Inventory investment refers to the net change in the physical stock of goods held by businesses.
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30According to the Life Cycle Hypothesis, individuals plan their consumption and savings over their life to:
A.Maximize wealth at death
B.Smooth consumption over their lifetime
C.Consume everything in youth
D.Save everything for old age
Correct Answer: Smooth consumption over their lifetime
Explanation:The Life Cycle Hypothesis (Modigliani) states that individuals aim to maintain a stable level of consumption over their lifetime, saving during working years and dissaving during retirement.
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31What is the relationship between taxes and the propensity to consume?
A.Direct relationship
B.Inverse relationship
C.No relationship
D.Proportional relationship
Correct Answer: Inverse relationship
Explanation:An increase in taxes reduces disposable income, which generally leads to a decrease in consumption expenditure.
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32The 'Pigou Effect' relates changes in consumption to changes in:
A.Real value of liquid assets due to price level changes
B.Interest rates
C.Income distribution
D.Future expectations
Correct Answer: Real value of liquid assets due to price level changes
Explanation:The Pigou Effect states that a fall in the price level increases the real value of money balances (wealth), prompting consumers to spend more.
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33If the consumption function is , what is the savings function?
A.
B.
C.
D.
Correct Answer:
Explanation:Since , . Substituting , .
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34Induced investment curve is:
A.Horizontal straight line
B.Vertical straight line
C.Upward sloping to the right
D.Downward sloping to the right
Correct Answer: Upward sloping to the right
Explanation:Induced investment increases as income increases. Therefore, the curve slopes upward to the right when plotted against income.
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35Which of the following factors would likely DECREASE investment?
A.Reduction in corporate taxes
B.Increase in business confidence
C.Increase in the cost of capital goods
D.Technological innovation
Correct Answer: Increase in the cost of capital goods
Explanation:If the cost of capital goods (Supply Price) increases, the Marginal Efficiency of Capital (MEC) falls, leading to a decrease in investment.
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36The distribution of income affects consumption. Generally, transferring income from the rich to the poor will:
A.Decrease aggregate consumption
B.Increase aggregate consumption
C.Have no effect
D.Increase savings significantly
Correct Answer: Increase aggregate consumption
Explanation:Lower-income groups typically have a higher MPC than higher-income groups. Transferring income to them increases total consumption demand.
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37Financial Investment implies:
A.Creation of new capital assets
B.Transfer of rights/titles of existing assets
C.Building of dams
D.Purchase of raw material
Correct Answer: Transfer of rights/titles of existing assets
Explanation:Financial investment (e.g., buying existing shares) is a transfer of ownership and does not directly add to the productive capacity of the economy (Real Investment).
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38Keynes termed the subjective factors influencing the consumption function as:
A.Psychological characteristics of human nature
B.Market imperfections
C.Government policies
D.Technological constraints
Correct Answer: Psychological characteristics of human nature
Explanation:Subjective factors include psychological motives like Precaution, Foresight, Calculation, Improvement, Independence, Enterprise, Pride, and Avarice.
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39In the short run, the relationship between APC and MPC is typically:
A.APC < MPC
B.APC = MPC
C.APC > MPC
D.APC + MPC = 1
Correct Answer: APC > MPC
Explanation:In a linear consumption function with a positive intercept (autonomous consumption), the Average Propensity to Consume falls as income rises but remains higher than the Marginal Propensity to Consume.
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40Net Investment can be negative if:
A.Gross Investment > Depreciation
B.Gross Investment = Depreciation
C.Gross Investment < Depreciation
D.Gross Investment is zero
Correct Answer: Gross Investment < Depreciation
Explanation:Since , if depreciation exceeds gross investment, net investment is negative (capital stock is shrinking).
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41Prospective Yield refers to:
A.Total revenue from a product
B.Net return expected from a capital asset over its lifetime
C.The interest paid to the bank
D.The scrap value of the asset
Correct Answer: Net return expected from a capital asset over its lifetime
Explanation:Prospective yield is the aggregate of the annual net returns expected from the capital asset over its useful life.
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42If the consumption function is , and income () is 100, calculate total consumption.
A.140
B.120
C.80
D.100
Correct Answer: 120
Explanation:.
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43Which economist highlighted the role of 'Animal Spirits' (spontaneous optimism) in investment decisions?
A.Adam Smith
B.J.M. Keynes
C.David Ricardo
D.Alfred Marshall
Correct Answer: J.M. Keynes
Explanation:Keynes used the term 'Animal Spirits' to describe the instincts, proclivities, and emotions that ostensibly influence and guide human behavior, specifically investment.
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44Autonomous consumption exists even when income is zero. How is this consumption financed?
A.Through current income
B.Through past savings or borrowing
C.Through taxes
D.Through investment
Correct Answer: Through past savings or borrowing
Explanation:When income is zero, individuals must use dissaving (past savings) or borrow money to sustain basic survival consumption (autonomous consumption).
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45What is the shape of the Keynesian Consumption Function curve?
A.Linear and starting from the origin
B.Linear and starting from positive y-intercept
C.Curved and starting from origin
D.U-shaped
Correct Answer: Linear and starting from positive y-intercept
Explanation:It is linear () and starts from a positive intercept 'a' on the Y-axis, representing autonomous consumption.
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46The concept of 'MEI' stands for:
A.Marginal Efficiency of Investment
B.Marginal Efficiency of Income
C.Mean Equity Investment
D.Marginal Equity Interest
Correct Answer: Marginal Efficiency of Investment
Explanation:MEI stands for Marginal Efficiency of Investment. It represents the rate of return expected from an additional unit of investment.
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47Investment is generally considered to be:
A.Less volatile than consumption
B.More volatile than consumption
C.Equally volatile as consumption
D.Stable over time
Correct Answer: More volatile than consumption
Explanation:Investment fluctuates significantly due to changes in expectations, technology, and interest rates, making it more volatile than consumption, which is relatively stable.
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48If the MPC is constant, the consumption function is:
A.Non-linear
B.Linear
C.Vertical
D.Horizontal
Correct Answer: Linear
Explanation:A constant MPC implies a constant slope, which results in a linear straight-line consumption function.
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49Windfall gains (unexpected income) generally lead to:
A.Shift of consumption function upwards
B.Shift of consumption function downwards
C.Movement along the curve
D.No change
Correct Answer: Shift of consumption function upwards
Explanation:Windfall gains (like winning a lottery or stock market booms) increase wealth, leading to higher consumption at the same level of regular income, shifting the curve upward.
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50In the equation , denotes:
A.Induced Investment
B.Net Investment
C.Autonomous Investment
D.Inventory Investment
Correct Answer: Autonomous Investment
Explanation:The notation typically indicates a constant value fixed exogenously, referring to Autonomous Investment.
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