Generally, which group of people has the highest marginal propensity to consume?

Question

Generally, which group of people has the highest marginal propensity to consume?

Question 1 options:

a)

b)

c)

d)

If the stock market collapses, consumption will:

Question 2 options:

a)

b)

c)

d)

What does the “paradox of thrift” say?

Question 3 options:

a)

b)

c)

d)

As income increases, consumption _____.

Question 4 options:

a)

b)

c)

d)

What is the main claim of the aggregate expenditures model?

Question 5 options:

a)

b)

c)

d)

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

Question 6 options:

a)

b)

c)

d)

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ exists, and will require a _____ in spending to bring the economy back to full employment.

Question 7 options:

a)

b)

c)

d)

Which of the following did classical economists believe would happen if the economy experienced a downturn?

Question 8 options:

a)

b)

c)

d)

Consumption spending is:

Question 9 options:

a)

b)

c)

d)

In the Keynesian aggregate expenditure model, which variable is assumed to be fixed?

Question 10 options:

a)

b)

c)

d)

What are the components of aggregate expenditures?

Question 11 options:

a)

b)

c)

d)

If the marginal propensity to save is 0.2 and income rises by $5,000, how much of this $5,000 will be consumed?

Question 12 options:

a)

b)

c)

d)

What does the 45-degree line in the Aggregate Expenditures model represent?

Question 13 options:

a)

b)

c)

d)

Which of the following are considered withdrawals from an economy?

Question 14 options:

a)

b)

c)

d)

Investment levels depend mainly on:

Question 15 options:

a)

b)

c)

d)

a)

wealthy people

b)

low-income people

c)

middle-class people

d)

the richest 1%

Explanation / Answer

Part 1) Low income people have the highest marginal propensity to consume because they need to buy a lot of thing for their survival and they cannot focus on investment or savings as their income is already very low.

Part 2) If the stock market collapses, consumption will decrease because people feel less wealthy. A stock market collapse results in vanishing of the savings of people that they have done in the form of investment in financial instruments.

Part 3) “Paradox of thrift” says an economy that saves too much can end up with lower total savings. This is because excessive savings will result in lower consumption that will have adverse impact on production. This will result in lower income and thereby lower level of savings.

Part 4) As income increases, consumption increases at a slower rate. This is because as income increases people are able to afford most of the goods and services needed for comfortable living. As a result they focus more on savings.

Part 5) The main claim of the aggregate expenditures model is that spending will generate income, which allows for more spending.

Part 6) Income will increase by $8,000 when there is an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes in a balanced budget multiplier situation with marginal propensity of consumption being 0.80.

Part 7) If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) inflationary gap exists, and will require a decrease in spending to bring the economy back to full employment.

Part 8) According to classical economists the economy would self-correct if the economy experienced a downturn.

Part 9) Consumption spending is spending by individuals and households on both durable and nondurable goods.

Part 10) In the Keynesian aggregate expenditure model the price level is assumed to be fixed.

Part 11) Components of aggregate expenditures are C + I + G + (X – M). Where C is consumption expenditure, I is investment, G is government spending and (X – M) is the net exports.

Part 12) If the marginal propensity to save is 0.2 and income rises by $5,000, then $4,000 will be consumed as the marginal propensity to consume is 0.8 (1 – 0.2).

Part 13) The 45-degree line in the Aggregate Expenditures model represent all consumption and no saving.

Part 14) imports; taxes; savings are considered withdrawals from an economy. This is because they reduce total income.

Part 15) Investment levels depend mainly on high levels of consumption in the economy. This is because with high level of consumption the demand for goods and services will increase thereby creating incentive for increased investment spending to meet the rising demand.

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