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ECON201 - S24 - Tutorial 5

The document contains sample questions from a tutorial on consumption and investment in macroeconomics. It includes multiple choice and calculation questions about consumption functions, marginal propensity to consume, marginal propensity to save, and related concepts.

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66 views4 pages

ECON201 - S24 - Tutorial 5

The document contains sample questions from a tutorial on consumption and investment in macroeconomics. It includes multiple choice and calculation questions about consumption functions, marginal propensity to consume, marginal propensity to save, and related concepts.

Uploaded by

elserry.com
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECON 201: Introduction to

Macroeconomics
Semester: Spring 2024

Tutorial 5
Chapter 21: Consumption and Investment

Question 1: Choose the correct answer:

Use Figure 1 to answer questions 1 through 4.

1. The solid line CC is the consumption function for some family or community. If the total amount
of consumption expenditure were EA, then the amount of disposable income must be:
a. AB.
b. FD.
c. FA.
d. DA.
e. none of the above.

2. Equivalently, given the same total amount of consumption expenditure EA in the diagram, then
the amount of disposable income must also be:
a. EA.
b. GB.
c. ED.
d. 0A.
e. none of the preceding.

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3. If the consumption function is given as line C’C’, and disposable income is equal to GB, then
savings must be equal to:
a. GJ.
b. HJ.
c. FG.
d. DJ.
e. FE.

4. A change in consumption expenditure from HB to EA could be the result of:


a. a decision to spend more and save less at each level of income.
b. a decrease in disposable income from 0B to 0A.
c. a decision to spend less and save more at each level of income.
d. an increase in disposable income from 0A to 0B.
e. none of the preceding.

5. A family spends $2000 on consumption when its income is 0, and $6000 on consumption when its
income is $6000. Assume that its consumption function is a straight line. This family’s marginal
propensity to consume is:
a. 2/3.
b. 3/4.
c. 4/5.
d. 1.
e. greater than 1.

6. The family from question 5 has a marginal propensity to save equal to:
a. 1/3.
b. 2/3.
c. 3/4.
d. 1/4.
e. $2000.

7. At the break-even level of income:


a. the MPC is equal to the MPS.
b. the MPS is equal to 0.
c. consumption is equal to saving.
d. saving is equal to 0.
e. households are borrowing more than they are saving.

8. The consumption function refers to:


a. the level of income at which consumption spending just equals income.

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b. the fraction of extra income that will be spent on consumption.
c. a schedule showing the amount a family (or community) will spend on consumption at
different levels of income.
d. the fact that, at low incomes, families spend more on consumption than the amount of their
incomes.

9. The marginal propensity to consume is:


a. the amount of extra consumption generated by an extra dollar of disposable income.
b. the total consumption divided by total disposable income.
c. equal to one minus the marginal propensity to save.
d. none of the above.
e. A and C.

10. Permanent income can be best described as:


a. money which has been saved for years and not likely to be spent by the household.
b. income left for the household after all taxes have been paid.
c. the sum of consumption and saving over the long run.
d. the long-run trend in household income.
e. none of the above.

11. Which of the statements below about savings is false?


a. One of the possible reasons for the decline in the personal savings rate is social security.
b. The improvement of capital and credit markets may have contributed to the decline in the
savings rate.
c. Saving can be viewed as a residual of what is left over after households spend their income.
d. All of the statements above are true.

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Question 2:

Assume a family has a weekly disposable income of $450. Its consumption spending equals $100
plus one-half of weekly Disposable Income (DI).

a. Calculate the consumption spending of this family.


b. Assume one family member now leaves home, so the consumption function changes. It now
becomes one-half of DI plus $75. If the family DI was unaffected by the change, calculate its
weekly consumption spending.
c. On a consumption function graph, this change would be represented as (choose the correct
answer):
i. a movement downward along the existing curve

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ii. a movement upward along the existing curve.
iii. a shift of the entire consumption function upward to a new position
iv. a shift of the entire consumption function downward to a new position

d. Suppose that a new consumption function is established, such that consumption spending
becomes two-fifths of DI plus $75. Write an equation that describes this consumption function.
What is the value of MPC and the value of MPS?

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Question 3:

Suppose a certain family’s weekly expenditure on consumption is governed by this rule: spend $100
plus one half of weekly disposable income.

DI C S
$0
100
200
300
400
500

a. Fill in the blanks in the table.


b. Plot the consumption function.
c. Determine the break-even point.
d. For the family depicted in your diagram, this intersection occurs where DI equals ($100 / $200
/ $300 / $400). To the left of this intersection, the consumption function lies (above / below)
the 45° line, and the family spends on C (more / less) than its DI. To the right of the intersection,
the consumption function lies (above / below) the 45° line, and the family spends (more / less)
than its DI. Given an income in excess of $200, therefore, the family would save part of its DI.
e. When DI equals $400, the vertical distance up to the 45° line from the X axis is ($500 / $400 /
$300). At this point, the vertical distance up to the consumption function from the horizontal
axis is ($500 / $400 / $300); this is the amount of C spending. The difference of ($0 / $100 /
$200), or the vertical distance between the two lines, is the amount of saving (S).
f. Your diagram also indicates that if the family’s DI were $300, it would (save / dissave) ($0 /
$50 / $100 / $150). If DI were $100, then it would (save / dissave) ($0 / $50 / $100 / $150).
h. Calculate MPC and MPS.
i. Plot the savings function.

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