Question 1

The marginal propensity to consume (MPC)is computed as the change in:
A)consumption divided by the change in savings.
B)consumption resulted by a given change in disposable personal income.
C)consumption divided by the change in GDP.
D)consumption multiplied by the change in savings.

Accepted Answer

The marginal propensity to consume (MPC) measures the change in consumption resulting from a given change in disposable personal income. It is calculated as the ratio of the change in consumption to the change in disposable income. Therefore, the correct answer is B, as it reflects the definition of MPC.

Question 2

According to Keynes,what is the most important determinant of households' spending on goods and services?
A)Price levels.
B)Interest rates.
C)Autonomous consumption.
D)Disposable income.

Accepted Answer

According to Keynes, the most important determinant of households' spending on goods and services is disposable income. This is because the level of disposable income available to households greatly influences their ability to purchase goods and services. As disposable income increases, households are more likely to spend money on goods and services, whereas if disposable income decreases, spending on goods and services is likely to decrease as well.

Question 3

As income grows,the consumption:
A)decreases.
B)grows the same as income.
C)grows by less than income.
D)grows by more than income.

Accepted Answer

C) grows by less than income. This is because as people earn more, they tend to save a higher proportion of their income, meaning the marginal propensity to consume decreases.

Question 4

If people believe inflation is likely to increase sharply over the next few months,which of the following is likely to occur?
A)Current consumption will fall.
B)Current consumption will rise.
C)Government spending will increase.
D)Interest rates will fall.

Accepted Answer

If people anticipate higher inflation, they are likely to spend more now to avoid higher prices later, thus increasing current consumption.

Question 5

If your disposable personal income increases from $30 000 to $40 000 and your savings increase from $2000 to $4000,your marginal propensity to save (MPS)is:
A)0.2.
B)0.4.
C)0.5.
D)0.8.
E)1.

Accepted Answer

The marginal propensity to save (MPS) is calculated as the change in savings divided by the change in disposable income. The change in savings is $4000 - $2000 = $2000, and the change in income is $40,000 - $30,000 = $10,000. Therefore, MPS = $2000 / $10,000 = 0.2.

Question 6

A large decrease in Australia's share market index may cause:
A)an increase in consumption to compensate.
B)an increase in investment to compensate.
C)a decrease in consumption.
D)a large increase in economic growth.

Accepted Answer

A large decrease in the share market index usually indicates a decline in the overall economy, resulting in a decrease in consumer confidence and a decrease in consumption. It is unlikely to cause an increase in investment, as investors usually become cautious during times of economic uncertainty. Similarly, a large decrease in share market index is unlikely to result in a large increase in economic growth.

Question 7

The fraction of each added dollar of disposable income that is used for consumption is called the:
A)average propensity to consume (APC).
B)autonomous consumption rate (ACR).
C)marginal consumption propensity (MCP).
D)marginal propensity to consume (MPC).
E)total propensity to consume (TPC).

Accepted Answer

The definition given in the question matches with the definition of marginal propensity to consume (MPC). MPC measures the change in consumption resulting from a change in disposable income. It is calculated by dividing the change in consumption by the change in disposable income.

Question 8

The consumption function explains:
A)the relationship between consumption and dissaving.
B)how much households want to spend on goods and services at different levels of disposable income.
C)purposes of consumption.
D)none of these.

Accepted Answer

The consumption function shows how much households want to spend on goods and services at different levels of disposable income. It does not deal with dissaving or purposes of consumption.

Question 9

The founder of the classical school of economics was:
A)Jean Say.
B)John Keynes.
C)Adam Smith.
D)John Howard.

Accepted Answer

Adam Smith is widely regarded as the founder of the classical school of economics, with his seminal work "The Wealth of Nations" published in 1776 laying out many of the basic principles of the classical school. Jean Say is also a prominent figure in the classical school, but he came after Smith and built on his ideas. John Keynes, on the other hand, is associated with the Keynesian school of economics, which challenged many of the classical assumptions. John Howard is not a significant figure in the history of economics.

Question 10

Keynes placed great primacy on the:
A)production function.
B)supply side of the economy.
C)demand side of the economy.
D)delivery of inputs to producer.

Accepted Answer

Keynes believed that the demand side of the economy, especially consumer demand, was the primary driver of economic growth and stability. He argued that government intervention in the form of fiscal policy was necessary to boost demand during times of recession or slump.

Question 11

A share market boom is often accompanied by:
A)an increase in consumption.
B)falling real GDP.
C)falling investment.
D)rising unemployment.
E)a decrease in imports.

Accepted Answer

A share market boom typically leads to an increase in wealth and confidence for investors, which in turn leads to an increase in consumption as people have more money to spend.

Question 12

Aggregate expenditures are the sum of:
A)consumption, investment and government spending minus net exports.
B)consumption, government spending and net exports.
C)consumption, investment, government spending and net exports.
D)production, investment, government spending and net exports.

Accepted Answer

Aggregate expenditures include consumption spending, investment spending, government spending, and net exports. Choice A is incorrect because net exports are added to the other components, not subtracted. Choice B is incorrect because it does not include investment spending. Choice D is too broad and includes production which is not part of aggregate expenditures.

Question 13

The hands-off view of the classical school rests on which of the following two simple propositions about markets?
A)Demand creates its own supply and markets are basically competitive.
B)Industrial policy is inevitable and all prices are flexible.
C)Market failure occurs and prices are rigid.
D)Wages are sticky downwards and market failure is inevitable.
E)Markets are basically competitive and prices are flexible.

Accepted Answer

The hands-off view of the classical school rests on two simple propositions: that markets are basically competitive and that prices are flexible. This means that the market will always find a way to reach equilibrium and that no government intervention is necessary.

Question 14

The relationship between consumer expenditures and disposable income is the:
A)savings function.
B)tax rate function.
C)disposable income function.
D)consumption function.

Accepted Answer

The relationship between consumer expenditures and disposable income is best represented by the consumption function. This function shows how changes in disposable income affect consumer spending, which is a key factor in determining overall economic growth. The function can be expressed as C = a + bYd, where C is consumer spending, a is autonomous consumption (spending that doesn't depend on disposable income), b is the marginal propensity to consume (the portion of additional income that is spent), and Yd is disposable income. Therefore, D is the correct choice.

Question 15

Classical economists believed that:
A)the forces of market supply will alone achieve equilibrium.
B)a long continuing prosperity is impossible.
C)a long continuing depression is impossible.
D)the forces of market demand will alone achieve equilibrium.

Accepted Answer

Classical economists, such as Adam Smith, believed in the self-regulating nature of the economy. They argued that market mechanisms, through the interaction of supply and demand, would naturally correct any short-term imbalances, making a long continuing depression impossible. They trusted in the economy's ability to return to a state of equilibrium without the need for significant government intervention.

Question 16

Classical economics argued that:
A)the supply curve should remain vertical in the long run.
B)the First World War was fought to free Britain from economic ruin.
C)depression was only a short-run, temporary departure from full-employment equilibrium.
D)funeral plots need to be determined by the market.
E)market-based realities cause estate taxes to be too high.

Accepted Answer

Classical economics theorized that the economy will tend towards full-employment equilibrium in the long-run, meaning that any deviations from this state (e.g. depressions, recessions) are only temporary and will eventually correct themselves. This is known as the "invisible hand" principle, which posits that the market will naturally adjust and coordinate itself towards efficiency without the need for government intervention. Therefore, choice C, which reflects this view, is the correct option. Choices A, D, and E do not reflect classical economic theory. Choice B is historically inaccurate as Britain did not fight in the First World War for economic reasons.

Question 17

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows:
A)unemployment is not possible in the short run.
B)demand and supply are never equal.
C)supply creates its own demand.
D)demand creates its own supply.

Accepted Answer

The law of markets based on Say's idea that supply creates its own demand means that the act of selling goods or services produces income which in turn creates demand for other goods and services. Therefore, there should never be a general glut or overproduction of goods, as long as markets are allowed to operate freely.

Question 18

What is the title of the John Maynard Keynes's book published in 1936 that challenged the classical self-correction economic theory?
A)In the Long Run, We are Dead.
B)Classical Economics Revised.
C)General Theory of Employment, Interest and Money.
D)A Keynesian Approach to Economic Policy.

Accepted Answer

The book published by John Maynard Keynes in 1936 that challenged the classical self-correction economic theory is titled "General Theory of Employment, Interest and Money". The other options are not the titles of this book.

Question 19

If your MPS is 0.60 that means that:
A)for every dollar increase in your disposable income, consumption will decrease by 60 cents.
B)for every dollar decrease in your disposable income, consumption will increase by 60 cents.
C)for every dollar increase in your disposable income, consumption will increase by 60 cents.
D)for every dollar increase in your disposable income, consumption will remain unchanged.

Accepted Answer

MPS (marginal propensity to save) is the portion of an increase in income that is saved, rather than spent on consumption. So, if your MPS is 0.60, it means that for every dollar increase in your disposable income, you will save 60 cents and spend the remaining 40 cents on consumption. Therefore, for every dollar increase in your disposable income, consumption will increase by 60 cents.

Question 20

The classical theory that states that 'supply creates its own demand' was developed by:
A)Adam Smith.
B)John Keynes.
C)Jean-Baptiste Say.
D)Richard Say.

Accepted Answer

The classical theory that 'supply creates its own demand' was developed by French economist Jean-Baptiste Say in the early 19th century. Adam Smith is considered the father of modern economics and was a proponent of the invisible hand theory, while John Keynes developed the Keynesian theory of economics. Richard Say, on the other hand, is not a known economist.

Quiz 14: A simple model of the macro economy

The marginal propensity to consume (MPC) is computed as the change in:

According to Keynes,what is the most important determinant of households' spending on goods and services?

As income grows,the consumption:

If people believe inflation is likely to increase sharply over the next few months,which of the following is likely to occur?

If your disposable personal income increases from $30 000 to $40 000 and your savings increase from $2000 to $4000,your marginal propensity to save (MPS) is:

A large decrease in Australia's share market index may cause:

The fraction of each added dollar of disposable income that is used for consumption is called the:

The consumption function explains:

The founder of the classical school of economics was:

Keynes placed great primacy on the:

A share market boom is often accompanied by:

Aggregate expenditures are the sum of:

The hands-off view of the classical school rests on which of the following two simple propositions about markets?

The relationship between consumer expenditures and disposable income is the:

Classical economists believed that:

Classical economics argued that:

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows:

What is the title of the John Maynard Keynes's book published in 1936 that challenged the classical self-correction economic theory?

If your MPS is 0.60 that means that:

The classical theory that states that 'supply creates its own demand' was developed by: