Question

Indicate whether each of the following statement is True or False.

g) A household purchase of new housing constitutes investment expenditure.

h) The larger the marginal propensity to consume the smaller the multiplier.

i) Higher consumer confidence in the economy causes a downward movement along aggregate

demand curve.

j) The higher the interest elasticity of investment the flatter the IS curve.

k) The lower the interest sensitivity of money demand the steeper the LM curve.

l) To rescue a country’s currency from depreciating under fixed exchange rate practice, the

central bank must sell its reserve

Answer 1

g) False

Investment expenditure is the expense in the means of production or capital which is futher used to prodcue goods and services. A house is hardly used to produce anything and is considered final product which consumers consume for living.Hence it is a consumption expenditure and not investment expenditure.

h) False

The size of multiplier is determined by marginal propensity to consume. Both marginal propensity to consume and multiplier are directly related. In short,higher the MPC,greater will be multiplier effect and vice versa.

i) False

An increase in consumers confidence in the economy brings about an increase in the aggregrate demand curve i.e. it causes a rightward shift in the AD curve while if consumers lose confidence in the economy,cause decrease AD curve i.e. shifts leftward.

j) True

The slope of IS curve depends upon a key parameter which is interst elasticity of investment.The higher will be the interst elasticity of investment,it will increase the confidence of consumers in the economy nd this will be make IS curve flatter.

k) True

The steepness of LM curve depends upon the sensitivity of investment spending. If investment spending is sensitive to change in the interest rate flatter will be the curve while if investment spending is insensitive to change in the interest rate,steeper will be the LM curve.