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

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: (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: (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.