Economics Test - 7

The correct answer is Option 3.

Important Points

• Marginal propensity to save (MPS)
• Marginal Propensity to consume (MPC)
  • MPS + MPC = 1
  • MPC = 1 - MPS
• For sake of convenience, suppose a man’s income Increases by Rs 1. If out of it, he spends 70 paise on consumption (i.e., MPC = 0.7) and saves 30 paise (i.e., MPS = 0 3) then MPC + MPS = 0.7 + 0.3 = 1.

The correct answer is Option 2.

 Key Points

• The concept of 'Investment Multiplier is an important contribution of Prof. J.M. Keynes. Keynes believed that an initial increment in investment increases the final income by many times. Multiplier expresses the relationship between an initial increment in investment and the resulting increase in aggregate income.
• The multiplier tells us how much increase in income occurs when autonomous investment increases by Rs. 1, that is, investment multiplier ∆Y/∆I is and its value is equal to 1/1-b where b stands for marginal propensity to consume (MPC).
• Thus, multiplier =∆Y/∆I =1/ 1-b equals marginal propensity to save (MPS) the value of investment multiplier is equal to 1/1-b = 1/s where s stands for marginal propensity to save. In other words, the size of multiplier is equal to 1/1- MPC = 1/MPS Thus, the value of multiplier can be obtained if we know either the value of MPS or MPC.

The correct answer is Option 2.

Key Points

• Autonomous Investment means an investment that remains unaffected by the changes in the level of income, rate of interest, and rate of profit. On the contrary, induced investment is one that is positively related to the level of income, output, and profit.
• The establishment of public health centres and governments' investment in saving Sunder-ban forests are investments done without a profit motive.
• Autonomous Investments can include government investments, funds allocated to public goods or infrastructure, and any other type of investment that is not dependent on changes in GDP.
• Suppose the total capacity of the firm is that it can produce 500 units of output from 100 machines. Now, if the firm makes an investment to change the existing machinery, with more advanced machinery that can produce 500 units of output from 10 machines. It is said to be autonomous investment, as there is no increase in capacity.
• The government has set up public health centres in rural areas without any rate of interest and any rate of profit under the social schemes. Hence, Public Health Centres are autonomous investments.

The correct answer is option 3.

Key Points

Given C = 500 + (0.9)Y,

Investment expenditure, (I) = Rs.3,000;

At equilibrium level, Y = C+I

⇒ Y = 500 + (0.9) Y + 3,000

⇒ Y - (0.9)Y = 3,500 = > (0.1)Y = 3, 500Y = 3, 5

000.1 = 735,000 Y = 3,5000.1 = >35,000. Therefore

equilibrium level of Income = Rs. >35,000.

The correct answer is Option 1.

Key Points

• Sr. Ex-ante Investment 
  • It refers to the planned or intended investment during a particular period of time.
  • It is imaginary (intended), in which a firm assumes the level of investment on its own. 
  • It is planned on the basis of future expectations.

The correct answer is option 2.

Key Points

• Ex-post Investment : 
  • It refers to the actual level of investment during a particular period of time.  . 
  • It is factual or original that signifies the existing investment of a particular time. 
  • It is the actual result of variables.
• It refers to the actual level of investment during a particular period of time. It is factual or original that signifies the existing investment of a particular time 

Additional Information

• Ex-ante Investment: 
  • It refers to the planned or intended investment during a particular period of time.
  • It is imaginary (intended), in which a firm assumes the level of investment on its own. 
  • It is planned on the basis of future expectations.

The correct answer is Option 1.

Key Points

The relationship between MPC and MPS can be explained as-

Y = C + S (Assuming that the income earned is either consumed or saved)

Or,  ∆Y =  ∆C + ∆S

Dividing both sides by  ∆Y

\(\frac{{\Delta Y}}{{\Delta Y}} = \frac{{\Delta C}}{{\Delta Y}} + \frac{{\Delta S}}{{\Delta Y}}\,\left[ {\frac{{\Delta S}}{{\Delta Y}} = MPS} \right]\)

Or, 1 MPC + MPS

Or, MPC = 1 - MPS

Or, MPS = 1 - MPC

So, the sum of MPC and MPS is always equal to unity.

The correct answer is Option 4.

Key Points

• The paradox of thrift refers to a situation in which people tend to save more money, thereby, leading to a fall in the savings of the economy as a whole, In other words, when everyone increases his/her saving-income proportion i.e. MPS (s), then, the aggregate demand will fall as consumption decreases.
• This will further lead to a decrease in employment and income level and finally, this will reduce the total savings for the economy.
• This concept was suggested by Keynes wherein increased saving at individual levels will gradually lead to the slowdown of the economy in terms of the circular flow of income.

The correct answer is Option 3.

Key Points

• The equilibrium income is defined as the level of income where AD = AS which means Aggregate Demand is = to the Aggregate supply. Planned savings is always = to the planned investment.
• whenever aggregate demand equals total output, saving also equal investment. This means that the point at which saving and investment are equal
  refers to the equilibrium level of income

The correct answer is Option 4.

Key Points

Extent of savings depends on level of consumption.

Thus, MPC determines the level of MPS. The sum of the MPC and MPS is always equal to one. 

MPC + MPS 1

Or MPC = 1 - MPS

Or MPS1 - MPC