Macro

Income & Employment

Medium

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Aggregate Demand and Its Components

Consumption may denote not what people have actually consumed in a given year, but what they had planned to consume during the same period. Similarly, investment can mean the amount a producer plans to add to her inventory. It may be different from what she ends up doing. The planned values of the variables are called their ex ante measures. The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income.

Which of the following is not correct for marginal propensity to consume?

MPC=0

MPC=1

0 < MPC > 1

0< MPC<1

✅ Correct Option: 3

Option 1 -> MPC = 0 means all additional income is saved, none is consumed. This is theoretically possible.

Option 2 -> MPC = 1 means all additional income is consumed, none is saved. This is also theoretically possible.

Option 3 -> 0 < MPC > 1 is mathematically incorrect notation and implies MPC > 1, which violates economic theory as you cannot consume more than 100% of additional income.

Option 4 -> 0 < MPC < 1 represents the normal and most common range for MPC in economics.

Hence, Option 3 -> The notation '0 < MPC > 1' is incorrect both mathematically and economically. The correct notation for a range should use consistent inequality symbols (like 0 < MPC < 1). Additionally, MPC cannot exceed 1 because marginal propensity to consume represents the fraction of additional income spent on consumption, which cannot logically be more than 100%. The valid range for MPC is 0 ≤ MPC ≤ 1. -> correct

Question 46

Which one is not the component of a aggregate demand for final goods?

Question 47

In a given consumption function C=50+0.5Y, autonomous consumption is.

Question 48

Savings are that part of income that is not consumed. What is the marginal propensity to save?

Question 50

Machines produced in an economy in a given year are a part of ................

Which of the following is not correct for marginal propensity to consume?

Solution

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