Simple Keynesian (Aggregate Spending) Model

Which of the following options is FALSE? At the equilibrium level of national income, ___.

• aggregate spending equals aggregate production.

• aggregate spending equals aggregate income.

• aggregate income equals aggregate production.

• aggregate income equals aggregate production, but the level of aggregate spending is irrelevant.

Which of the following statements is/are TRUE?

"If aggregate expenditure is equal to total income, this means ___."

• nothing, because they are always equal by definition

• inventories will remain at their planned levels.

• investment will decrease to run down inventories.

• investment will increase to build up inventories.

In the simplest (or introductory) form of the Keynesian model, which of the following decisions can we analyse?

• Interest rate fluctuations

• Foreign investment by firms

• Savings of households

• Wage levels in firms

In the simplest version of the Keynesian model, income is determined by ___.

• consumption spending

• investment spending

• consumption and investment spending

• consumption, investment, and government spending

Which one of the following is NOT an assumption of the Simple Keynesian model?

• The economy consists of households and firms.

• Prices are given.

• There is no government or foreign sector.

• Income is never equal to production

Which of the following statements about the consumption function is true?

• The level of autonomous consumption is determined by the level of income.

• The level of induced consumption is determined by the level of wealth.

• The level of induced consumption is determined by the level of income.

• The level of consumption is determined only by the level of induced consumption.

The marginal propensity of consumption (MPC) measures the relationship between ___.

• a change in consumption and a change in income

• a change in consumption and savings

• changes in consumption and changes in savings

• None of the above.

Which one of the following factors will not increase the level of autonomous consumption?

• An increase in the interest rate

• An increase in prices

• A decrease in the interest rate

• An increase in the value of shares

Which one of the following statements about the consumption function is FALSE?

• The consumption function has a positive slope.

• The slope of the consumption function is determined by the level of autonomous consumption.

• The slope of the consumption function is equal to the marginal propensity to consume.

• The slope of the consumption function relates to induced consumption.

If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to R15 000, then its marginal propensity to consume is ___.

• -0.67

• 0.88

• 0.2

• 1

Answer explanation

If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to R15 000, then its marginal propensity to consume is 1. This is because when income fell by R3000, consumption ALSO fell by R3000. The change was 1-to-1.