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Determinants of Consumption and Saving quiz

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  • What is the marginal propensity to consume (MPC) in the context of the consumption function?
    The marginal propensity to consume is the slope of the consumption function, showing how much consumption changes with a change in disposable income.
  • How does an unexpected increase in wealth affect the consumption function?
    An unexpected increase in wealth shifts the consumption function upward, leading to higher current consumption.
  • What happens to consumption if there is an unexpected decrease in wealth, such as a stock market crash?
    An unexpected decrease in wealth shifts the consumption function downward, causing a reduction in current consumption.
  • How does borrowing influence current and future consumption?
    Borrowing increases current consumption but reduces future consumption due to the need to repay the loan with interest.
  • What effect do expectations of higher future prices have on current consumption?
    Expectations of higher future prices increase current consumption as people prefer to buy now before prices rise.
  • How do expectations of higher future income affect current consumption?
    Expectations of higher future income lead to increased current consumption, as people anticipate having more money later.
  • What is the likely effect on current consumption if people expect a recession?
    If people expect a recession, they decrease current consumption to save more for tougher times ahead.
  • How do low real interest rates affect borrowing and saving?
    Low real interest rates encourage more borrowing and reduce the incentive to save, leading to increased consumption.
  • What are determinants of consumption and saving besides disposable income?
    Determinants include changes in wealth, borrowing, expectations about the future, and real interest rates.
  • How do changes in determinants other than disposable income affect the consumption function?
    They cause the entire consumption function to shift up or down, rather than just moving along the curve.
  • Why might someone increase consumption if they expect a raise next year?
    They anticipate having more income in the future, so they feel comfortable spending more now.
  • What is the opportunity cost of borrowing to increase current consumption?
    The opportunity cost is reduced future consumption due to loan repayment and interest.
  • How does a sudden increase in stock prices typically affect consumer behavior?
    It increases consumer wealth, leading to higher current consumption.
  • Why do low real interest rates reduce the incentive to save?
    Because the return on savings is low, people prefer to spend rather than save.
  • How do these determinants of consumption and saving impact market equilibrium?
    They influence overall consumption patterns, which in turn affect market equilibrium and economic incentives.