Practice Questions

Identify the term for the level of consumption that is independent of income.

Propose a modification to the basic aggregate demand equation (AD = C + I) to make it more realistic for an open economy with a government sector.

Define ex-ante investment.

Contrast autonomous consumption and induced consumption.

Calculate the value of the investment multiplier if the marginal propensity to save (MPS) in an economy is 0.25.

Critique the consumption function C = C_bar + cY by identifying one major real-world factor it omits that could significantly influence household consumption.

Justify the assertion that MPC + MPS must equal 1.

Justify why a horizontal line is used to graphically represent autonomous investment in the Keynesian model.

Calculate the change in national income if autonomous investment increases by Rs 500 crores and the consumption function is C = 100 + 0.6Y.

Recall the formula for the investment multiplier.

Name the graphical representation of aggregate supply in the Keynesian model where the price level is fixed.

What does the term 'ceteris paribus' mean?

Explain the two components of the consumption function, C = C̄ + cY.

Evaluate the statement: 'An increase in the Marginal Propensity to Consume (MPC) is always beneficial for an economy.'

Critique the concept of equilibrium in the Keynesian model. Does it necessarily represent a desirable state for the economy?

Propose two reasons why the actual investment multiplier in an economy is likely to be smaller than the theoretical value calculated by the formula 1/(1-MPC).

Examine the relationship between the marginal propensity to consume (MPC) and the value of the autonomous expenditure multiplier.

Describe the relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS).

Explain the difference between ex-ante and ex-post measures in macroeconomics, using investment as an example.

Explain what happens in an economy if ex-ante aggregate demand is less than ex-ante aggregate supply.

Describe the concept of autonomous investment as used in the Keynesian model. How is it represented on a graph?

In an economy with the consumption function C = 200 + 0.75Y, and autonomous investment (I) of 100, calculate the equilibrium level of national income.

Solve for the level of savings in an economy at equilibrium if the consumption function is C = 50 + 0.9Y and autonomous investment is 100.

Calculate the marginal propensity to consume (MPC) if an increase in investment of Rs 150 crores leads to an increase in national income of Rs 600 crores.

Justify why ex-ante aggregate demand, rather than ex-post demand, is the critical concept for determining the equilibrium level of income in the Keynesian framework.

Formulate an argument explaining why the 'Paradox of Thrift' is considered a paradox, and justify the conditions under which it holds true.

Create a numerical example to illustrate the multiplier effect. Assume initial equilibrium income is 500 crores, MPC is 0.75, and there is a new autonomous investment of 50 crores.

Calculate the value of autonomous consumption if, at an income level of 2000, consumption is 1800 and the marginal propensity to consume is 0.8.

Analyze the impact on the Aggregate Demand (AD) curve if the marginal propensity to consume (MPC) increases, assuming autonomous expenditure remains constant.

Define Average Propensity to Consume (APC) and Average Propensity to Save (APS).

Compare ex-ante investment and ex-post investment, providing an example of when they might differ.

Analyze why the aggregate supply curve is represented by a 45-degree line in the Keynesian framework of income determination.

Formulate a producer's likely response to a situation of unintended depletion of inventories.

Examine the Paradox of Thrift, explaining why an increase in the desire to save might lead to a decrease in the equilibrium level of income.

Explain the concepts of 'deficient demand' and 'excess demand' in relation to the full employment level of income.

Summarize the 'Paradox of Thrift'. Explain why an attempt by everyone to save more might not lead to an increase in total savings for the economy.

Describe the multiplier mechanism. Explain how an initial increase in autonomous investment leads to a larger increase in national income.

Evaluate the Keynesian assumption of a fixed price level and perfectly elastic aggregate supply in the short run. Is this a justifiable simplification for analyzing unemployment?

Evaluate the impact of a parametric shift in the consumption function caused by an increase in autonomous consumption (C_bar) versus an increase in the marginal propensity to consume (c).

Apply the concept of equilibrium to determine if an economy is in equilibrium when autonomous consumption is 50, MPS is 0.2, autonomous investment is 100, and the current level of income is 800.

Demonstrate the multiplier mechanism with a numerical example. Assume an initial increase in autonomous investment of Rs 200 crores and a marginal propensity to consume of 0.8.

Design a two-step fiscal policy intervention for a government to eliminate a deflationary gap (where equilibrium income is below full employment income), using the concepts from this chapter.

Summarize the concept of aggregate demand in a two-sector model and list its components. Explain how the aggregate demand function is derived graphically.

Analyze the statement: 'An economy cannot be in equilibrium if planned investment is greater than planned savings.'

Propose a scenario in which the 'Paradox of Thrift' would fail to hold true.