Question

1)Which of the following is true?

a)Marginal propensity to consume shows the change in consumption as a result of a change in disposable income.

b)Disposable income is roughly national income minus net taxes.

c)Disposable income is either saved or consumed.

d)Both b and c.

e)a, b, and c.

2)Everything else constant, inflation

a)Leads to an increase in a country’s net exports.

b)Increases firms’ inventories below the desired level.

c)Causes a movement along the aggregate demand curve, while shifting the expenditure line downward.

d)a and c.

e)All of the above.

3)Which of the following shifts the investment curve downward?

a)A decrease in disposable income.

b)An increase in the value of our domestic currency.

c)A decrease in the real interest rate.

d)None of the above.

Answer 1

1. e) a, b and c.

a) Marginal propensity to consume shows the change in consumption as a result of a change in disposable income.

b) Disposable income is roughly national income minus net taxes.

c) Disposable income is either saved or consumed.

Explanation :

Marginal propensity to consume shows how Change in consumption or the proportion of income spent by an individual on consumption occurs as a result of a change in disposable income of individuals. Thus, it is true.

Disposable income is roughly national income minus net taxes.National disposable income can be calculated by subtracting net taxes. Thus, it is true.

Disposable income which is the remaining income left after taxes and charges are being deducted from it and is either spent, consumed or saved for consumption. Thus, it is true that disposable income is either saved or consumed as decided by the household or an individual.

2.a) leads to an increase in the country's net export.

Explanation :

Everything else constant, inflation leads to an increase in the country's net export. Inflation leads to devaluation of currency making goods produced in domestic country cheaper compared to foreign goods,thus,making goods produced in foreign nations more expensive for the buyers of domestic nation.This gives rise to the net exports of the country.

Note that inflation increases firm's inventories above the desired level, not below the desired level.

3.a) A decrease in disposable income shifts the investment curve downward.

Explanation :

A decrease in disposable income will shift the investment curve downward because decrease in disposable income indicates decrease in consumption as income shows decline, therefore investment curve shifts downward.