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

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)

Classical economics is widely regarded as the first modern school of economic thought.

Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill. John Maynard Keynes was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics and formed the economic policies of governments.

He built on and greatly refined earlier work on the causes of business cycles and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century.

His ideas are the basis for the school of thought known as Keynesian economics, as well as its various offshoots.

Answer: (a)

According to the classical view, the rate of interest is determined by the interaction of the supply of and demand for capital.

Thus this theory is popularly called the demand and supply theory of the rate of interest. The supply of money together with the liquidity preference curve in theory interact to determine the interest rate at which the quantity of money demanded equals the quantity of money supplied.

According to Keynes, interest is the price paid for surrendering their liquid assets. Greater the liquidity preference higher shall be the rate of interest. The liquidity preference constitutes the demand for money.

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: (a)

Per capita income has lately been viewed as a better determinant of economic development and welfare.

However, high inequality can still diminish economic growth. So equal or more rational distribution of income in the favour of the poor is the best way to ensure that the welfare is holistic and leaves no quarters deprived as after all, economic welfare is a part and parcel of social welfare.

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.