Question 1

Suppose real disposable income increases by $500. Given this information, we know that

Accepted Answer

While an increase in disposable income should lead to an increase in consumption, individuals may choose to save some of that additional income or use it to pay off existing debts. Therefore, consumption will generally increase by less than the full amount of the increase in disposable income.

Question 2

-According to the above figure, planned consumption and income are equal at an income level of

Accepted Answer

The answer of 
-According to the above figure, planned consumption...

Question 3

When a family's income is low and it is spending more on consumption than it is receiving in income

Accepted Answer

If a family's income is low and it is spending more on consumption than it is receiving in income, it means that the family is either consuming its savings or borrowing to finance consumption. This indicates that some segment of the consumption function curve lies above the 45-degree line, indicating dissaving. Therefore, option D is the correct choice. The APC and MPC cannot be determined with the given information, and option B is not relevant to the situation described.

Question 4

In the graph for the consumption function, the 45-degree line

Accepted Answer

The 45-degree line represents points where consumption equals real disposable income. This means that any point on the line is a combination of planned consumption and actual income. Therefore, it represents both consumption and income, making options A and B incorrect. The APC (average propensity to consume) is not reflected in the 45-degree line, so option D is also incorrect.

Question 5

If consumption spending is greater than disposable income, then there is

Accepted Answer

If consumption spending is greater than disposable income, it means that the individual is spending more than what they are earning, hence they are dissaving.

Question 6

The consumption function shows how much

Accepted Answer

The consumption function is used by economists to represent the relationship between real disposable income and household consumption. It shows the level of consumption that households plan to undertake at each level of income. This helps to predict how changes in income levels will affect consumption patterns.

Question 7

-According to the above table, the marginal propensity to consume is

Accepted Answer

The answer of 
-According to the above table, the marginal...

Question 8

According to the above table, the marginal propensity to consume is
-According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the average propensity to consume?

Accepted Answer

The average propensity to consume (APC) is calculated by dividing consumption by the level of income (or GDP). If real GDP equals $30,000, and assuming from the given options that consumption at this income level corresponds to an APC of 0.75, it means that 75% of the income is being consumed. This is a direct calculation based on the definition of APC, which is the ratio of total consumption to total income.

Question 9

At the break-even point for the consumption function

Accepted Answer

At the break-even point for the consumption function, income is equal to the total amount spent on consumption. This means that there is no saving or dis-saving, and therefore saving is zero.

Question 10

If saving equals $100 when real disposable income equals $1,000, the break-even income is

Accepted Answer

The break-even income is the amount of income where spending equals income. Since saving is $100 when real disposable income is $1,000, spending must be $1,000 - $100 = $900. Therefore, the break-even income is the level of income where spending is equal to income, or $900. This is less than $1,000, so the correct answer is A.

Question 11

According to the permanent income hypothesis, a temporary and relatively small increase in income would

Accepted Answer

The permanent income hypothesis suggests that people will not significantly change their consumption patterns based on temporary and small increases in income. Therefore, a temporary and relatively small increase in income would cause no change in consumption according to this theory.

Question 12

Suppose when real disposable income is $5000, planned real consumption is $4000. When real disposable income increases to $6000, planned real saving increases by $500. The new planned real consumption expenditures is

Accepted Answer

Planned real saving = Planned real consumption - Real disposable income

When real disposable income = $5000, planned real consumption = $4000
So, Planned real saving = $4000 - $5000 = -$1000

When real disposable income increases to $6000, planned real saving increases by $500.
So, the new planned real saving is:
Planned real saving = -$1000 + $500 = -$500

Now, we can use the equation of national income accounting:
Y = C + S
where Y is real disposable income, C is planned real consumption, and S is planned real saving.

When Y = $5000, C = $4000, and S = -$1000
When Y = $6000, C = ?, and S = -$500

Thus, 
$6000 = C - $500
C = $6500

Therefore, the new planned real consumption expenditures is $6500 - which is choice letter B.

Question 13

The life-cycle theory of consumption predicts that when Jason anticipates a higher income in the future, then Jason will

Accepted Answer

According to the life-cycle theory of consumption, individuals plan their consumption over their lifetime based on their anticipated income in the future. Therefore, if Jason anticipates a higher income in the future, he would be more likely to consume more and save less in the current period, in order to maintain a similar level of consumption over his lifetime. This is because his expected future income would allow him to finance his future consumption needs without needing to save as much in the present.

Question 14

According to Keynes

Accepted Answer

Keynesian theory suggests that as real disposable income increases, both consumption and saving increase, but the marginal propensity to consume is less than one, meaning not all additional income is spent.

Question 15

-According to the above table, if real Gross Domestic Product (GDP) is $25,000, planned saving equals

Accepted Answer

The correct choice is based on the information provided in the table, which indicates that at a real GDP of $25,000, planned saving is $3,000.

Question 16

The break-even point on the consumption function represents the point where

Accepted Answer

The break-even point on the consumption function represents the point where consumption equals income. This is because at this point, there is no saving or dis-saving, meaning all of the income is being spent on consumption.

Question 17

According to the above table, the marginal propensity to consume is
-According to the above table, if real Gross Domestic Product (GDP) equals $30,000, planned saving equals

Accepted Answer

The answer of According to the above table, the marginal...

Question 18

According to the above table, the marginal propensity to consume is
-According to the above table, if real Gross Domestic Product (GDP) equals $25,000, what is the average propensity to save?

Accepted Answer

The answer of According to the above table, the marginal...

Question 19

According to the permanent income hypothesis, Lisa's consumption increases only when

Accepted Answer

The permanent income hypothesis suggests that individuals base their consumption on their average lifetime income rather than their current income. Therefore, Lisa's consumption would only increase if her average lifetime income increases, as this would adjust her perception of her long-term financial situation.

Question 20

According to the consumption function, if the level of real disposable income increases, then

Accepted Answer

According to the consumption function, an increase in real disposable income will lead to an increase in both consumption and savings, but the increase in consumption will be less than the increase in income, resulting in an increase in savings as well. Similarly, a decrease in real disposable income will lead to a decrease in both consumption and savings. Therefore, choice A, wherein both consumption and savings increase, is the correct answer.

Quiz 12: Consumption, Real GDP, and the Multiplier