introduction to macro economics section 6 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Irving Fisher, in His Theory of Interest (1930), found the relationship between interest rates (nominal interest rate and real interest rate) and the consumption level.

Though his theory is about the interest rate and inflation, it discusses the effect of real interest rates on savings and gives an inverse relationship between nominal interest rates and consumer expenditures.

Answer: (c)

Investment” is a broader concept that includes investment in all kinds of capital assets, whether physical property or financial assets.

In economic statistics and accounts, the capital formation can be valued gross, i.e., before deduction of consumption of fixed capital (or “depreciation”), or net, i.e., after deduction of “depreciation” write-offs.

The net valuation method views “depreciation” as the compensation for the cost of replacing fixed equipment used up or worn out, which must be deducted from the total investment volume to obtain a measure of the “real” value of investments; the depreciation write-off compensates and cancels out the loss in the capital value of assets used due to wear & tear, obsolescence, etc.

Answer: (c)

Keynes postulated that aggregate consumption is a function of aggregate current disposable income. The Keynesian consumption function is written as:

C = a + cY a > 0, 0 < c < 1;

where a is the intercept, a constant which measures consumption at a zero level of disposable income;

c is the marginal propensity to consume (MPC); and

Y is the disposal income.

So as income increases, the average propensity to consume (APC = C/Y) falls.

Answer: (b)

When the national output is multiplied by the present ruling price, we obtain national income at current prices.

On the other hand, if the national output is multiplied by the base price if called national income at constant price. But what is seen is that prices of commodities go on changing. When the current outputs are multiplied by the current prices it will give rise to monetary national income.

So a very rise in National Income at current or constant prices does not indicate an increase in product or output but is rather due to the rise in the price level.

Answer: (c)

Gilt-edged securities are bonds issued by governments. They are government securities, i.e., instruments issued by the government to borrow money from the market. Gilt-edged securities are a high-grade investment with very low risk.

Answer: (c)

Pump priming is the action taken to stimulate an economy, usually during a recessionary/deflationary period, through government spending, and interest rate and tax reductions.

Growth is accomplished through the increase in purchasing power experienced by those affected by the injection of funds, with the goal of promoting higher demand for goods and services.