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Economics Chapter on Consumption Function

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Economics Chapter on Consumption Function

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Questions and Answers

What is the main determinant of consumption according to the consumption function?

Consumer confidence

Disposable income (correct)

Interest rates

The composition of households

Which type of goods are considered durable goods?

Television sets (correct)

Food

Soap powder

Ice cream

What does the average propensity to consume (APC) measure?

Average consumption as a fraction of total income (correct)

Average total savings out of income

The change in consumption relative to disposable income

Total income spent on durable goods only

What is the marginal propensity to consume (MPC)?

The proportion of a change in income that is spent (D) Signup and view all the answers

According to Keynesian theory, what happens to the average propensity to consume as income increases?

It gradually declines (C) Signup and view all the answers

Which of the following is NOT considered a determinant of consumption?

Population growth (C) Signup and view all the answers

If a household's disposable income rises by £200 and consumption increases by £150, what is the MPC?

0.75 (B) Signup and view all the answers

What is characterized as non-durable goods?

Ice cream (B) Signup and view all the answers

How does an increase in interest rates typically affect consumption?

It decreases consumer spending (A) Signup and view all the answers

What is the general trend observed between consumption and disposable income between 1997 and 2013?

Consumption and disposable income both generally increased over the years. (A) Signup and view all the answers

What role does consumer confidence play in the purchase of non-essential items?

Higher confidence leads to increased spending on non-essential items. (D) Signup and view all the answers

Why is consumer durables like cars often financed through loans?

High purchase prices typically necessitate loans for most consumers. (D) Signup and view all the answers

How do rising interest rates influence car sales?

Increased payments on loans make car purchases less attractive. (A) Signup and view all the answers

What happens to household consumption when the value of stocks rises?

Overall consumption often increases due to higher wealth perception. (C) Signup and view all the answers

What impact do low interest rates have on consumer confidence in the car market?

They improve affordability, boosting consumer confidence and demand. (B) Signup and view all the answers

How does diminishing wealth affect household consumption?

It can lead to a reduction in consumption as households become cautious. (A) Signup and view all the answers

What effect does consumer confidence have during economic recessions?

It drops, leading to a pause in purchases of non-essential items. (A) Signup and view all the answers