Page 94 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 5: Consumption Function

Self Assessment Notes

Multiple Choice Questions:
1. The consumption function shows the relationship between consumption and .........................
(a) Savings

(b) Income
(c) Demand
(d) Supply
2. Which of the following is not one of the propositions of the Psychological Law?
(a) When aggregate income increases, consumption expenditure also increases but by a
somewhat smaller amount.
(b) When income increases, the increment of income will be divided in a certain
proportion between consumption and saving.
(c) As income increases both consumption spending and saving will go up.
(d) When income is consistent, consumption must be equal to savings.
3. Which of the following is not a requisite for Psychological law?

(a) Habits of people regarding spending do not change.
(b) The conditions are normal in the economic system.
(c) Existence of a capitalistic laissez faire economy.

(d) State should have some degree of interference in productive enterprise.
4. Which of the following represents the consumption function?
(a) C= f(Y)
(b) Y=f(C)
(c) C= f(1/Y)

(d) C= f(C/Y)

5.2 Propensity to Consume

Keynes has made use of four concepts in analysing consumption-income relationship.
These are:

Average propensity to consume
Marginal propensity to consume
Average propensity to save
Marginal propensity to save

Consider the following data of a hypothetical economy.
Columns 1 and 2 in Table 5.1 indicate the amount of consumption expenditures of this society at
various income levels. In this schedule, just as demand curve shows the purchases that will be
made at different prices. Column 3 shows the savings of the society at various income levels.

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