Q.1 What does the consumption function primarily show?
Relationship between income and savings
Relationship between income and consumption
Relationship between investment and interest rate
Relationship between demand and supply
Explanation - The consumption function explains how household consumption changes with variations in disposable income.
Correct answer is: Relationship between income and consumption
Q.2 In Keynesian theory, what is the main determinant of consumption?
Rate of interest
Disposable income
Price level
Government spending
Explanation - According to Keynes, consumption is largely determined by the level of disposable income available to households.
Correct answer is: Disposable income
Q.3 What does APC stand for in the context of consumption function?
Average Propensity to Consume
Average Productivity of Capital
Aggregate Price of Commodities
Average Production Curve
Explanation - APC represents the ratio of total consumption to total income at a given level of income.
Correct answer is: Average Propensity to Consume
Q.4 Which of the following is the formula for the Marginal Propensity to Consume (MPC)?
ΔC / ΔY
C / Y
Y / C
ΔY / ΔC
Explanation - MPC is calculated as the change in consumption (ΔC) divided by the change in income (ΔY).
Correct answer is: ΔC / ΔY
Q.5 If MPC = 0.8, what is the value of MPS?
0.2
0.5
0.8
1
Explanation - Since MPC + MPS = 1, if MPC = 0.8, then MPS = 0.2.
Correct answer is: 0.2
Q.6 Which economist introduced the concept of the consumption function?
Adam Smith
John Maynard Keynes
Milton Friedman
David Ricardo
Explanation - Keynes first introduced the concept of the consumption function in his General Theory (1936).
Correct answer is: John Maynard Keynes
Q.7 What does the slope of the consumption function represent?
APC
MPC
MPS
Income elasticity of demand
Explanation - The slope of the consumption function shows how much consumption changes with a change in income, i.e., MPC.
Correct answer is: MPC
Q.8 Which of the following is an autonomous component of consumption?
Consumption dependent on income
Consumption independent of income
Consumption based on savings
Consumption based on government spending
Explanation - Autonomous consumption is the part of consumption that does not depend on income.
Correct answer is: Consumption independent of income
Q.9 If income is zero, but consumption is positive, what is this consumption called?
Induced consumption
Autonomous consumption
Marginal consumption
Average consumption
Explanation - Even at zero income, households spend on basic needs. This spending is called autonomous consumption.
Correct answer is: Autonomous consumption
Q.10 What does induced consumption depend upon?
Government policies
Rate of interest
Level of income
Foreign trade
Explanation - Induced consumption rises with an increase in income.
Correct answer is: Level of income
Q.11 In Keynesian theory, what is the main determinant of investment?
Marginal efficiency of capital and interest rate
Disposable income
Government expenditure
Export levels
Explanation - Investment decisions depend on expected returns (MEC) and the cost of borrowing (interest rate).
Correct answer is: Marginal efficiency of capital and interest rate
Q.12 Which of the following best defines 'marginal efficiency of capital'?
Expected profit rate from additional capital
Marginal cost of capital
Marginal propensity to consume
Marginal savings rate
Explanation - MEC is the expected rate of return from an additional unit of capital asset.
Correct answer is: Expected profit rate from additional capital
Q.13 If interest rates rise, investment is likely to:
Increase
Decrease
Remain unchanged
Double
Explanation - Higher interest rates increase the cost of borrowing, which discourages investment.
Correct answer is: Decrease
Q.14 Which of the following is a psychological factor influencing consumption?
Level of income
Rate of interest
Future expectations
Tax policies
Explanation - Expectations about future income and economic conditions influence household consumption decisions.
Correct answer is: Future expectations
Q.15 What happens to consumption when disposable income increases?
Consumption decreases
Consumption increases
Consumption remains constant
Consumption becomes autonomous
Explanation - Higher disposable income enables households to spend more, increasing consumption.
Correct answer is: Consumption increases
Q.16 The investment demand curve slopes:
Upward
Downward
Horizontal
Vertical
Explanation - The investment demand curve slopes downward because investment decreases as interest rates rise.
Correct answer is: Downward
Q.17 In the consumption function C = a + bY, what does 'a' represent?
MPC
Induced consumption
Autonomous consumption
Total income
Explanation - In the linear consumption function, 'a' denotes consumption independent of income.
Correct answer is: Autonomous consumption
Q.18 In the same function C = a + bY, what does 'b' represent?
APC
MPS
MPC
Autonomous consumption
Explanation - The coefficient 'b' measures the marginal propensity to consume, i.e., how much consumption changes with income.
Correct answer is: MPC
Q.19 If income rises by 100 and consumption rises by 80, what is the MPC?
0.8
0.2
1.2
0.5
Explanation - MPC = ΔC / ΔY = 80 / 100 = 0.8.
Correct answer is: 0.8
Q.20 Which of the following factors can shift the consumption function upward?
Decrease in disposable income
Increase in taxes
Improved consumer confidence
Higher interest rates
Explanation - Optimistic expectations about future income shift the consumption function upward at all income levels.
Correct answer is: Improved consumer confidence
Q.21 According to Keynes, what type of function is the consumption function?
Linear
Non-linear
U-shaped
Exponential
Explanation - Keynes proposed a linear consumption function in the short run: C = a + bY.
Correct answer is: Linear
Q.22 What does MPS stand for?
Marginal Product of Savings
Marginal Propensity to Save
Marginal Price of Stock
Marginal Propensity of Supply
Explanation - MPS is the fraction of additional income saved rather than consumed.
Correct answer is: Marginal Propensity to Save
Q.23 Which of the following is NOT a determinant of investment?
Rate of interest
Technological innovations
Consumer tastes
Business expectations
Explanation - Consumer tastes affect demand but not directly investment decisions.
Correct answer is: Consumer tastes
Q.24 What happens to APC as income increases?
APC rises
APC falls
APC remains constant
APC becomes equal to MPC
Explanation - As income rises, the proportion spent on consumption falls, leading to a lower APC.
Correct answer is: APC falls
Q.25 If MPC = 1, what happens to savings?
Savings are zero
Savings are negative
Savings are maximum
Savings are equal to income
Explanation - If all income is consumed (MPC = 1), there is nothing left to save.
Correct answer is: Savings are zero