introduction to macro economics section 6 Practice Questions Answers Test with Solutions & More Shortcuts

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: (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)

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.