Module 3: Savings and Investment
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Questions and Answers

Which formula accurately represents the relationship between National Income, Consumption, Savings, Investment, Government Spending, and Net Exports?

  • Y = C + S + I + T + (x+m)
  • Y = C + S + I + G + (x+m)
  • Y = C + S + I + T + (x-m)
  • Y = C + S + I + G + (x-m) (correct)

    • What is indicated by the phrase 'propensity to save' in relation to personal income and savings?

  • It refers to the amount of savings that decreases as income increases.
  • It represents the relationship where savings increase less than proportionately as income increases. (correct)
  • It suggests that savings are independent of disposable income levels.
  • It indicates a direct relationship between consumption and national savings.

    • In the context of savings, what is meant by the term 'disposable income'?

  • The portion of income that is allocated to government spending.
  • Income that remains after taxes have been deducted. (correct)
  • Income that is fully consumed without reservation.
  • The total income before any deductions or consumption.

    • Which statement accurately describes the components of the savings function S = F(Y)?

    <p>S as the dependent variable indicates savings depend on the income level Y.</p> Signup and view all the answers

    What concept explains the potential contradiction between high savings rates and overall economic growth?

    <p>The Paradox of Thrift.</p> Signup and view all the answers

    What type of investment specifically refers to the replacement of worn-out capital goods?

    <p>Replacement Investment</p> Signup and view all the answers

    Which form of investment is primarily influenced by changes in income levels?

    <p>Induced Investment</p> Signup and view all the answers

    How is the average propensity to invest mathematically represented?

    <p>I / Y</p> Signup and view all the answers

    Which of the following best describes autonomous investment?

    <p>Investment independent of income changes</p> Signup and view all the answers

    According to the Acceleration Theory of Investment, what happens when income or consumption increases?

    <p>Investment increases by a multiple amount</p> Signup and view all the answers

    Study Notes

    Module 3: Savings and Investment

    • The economy operates around productive and monetary sectors, with the banking sector driving the monetary sector.
    • Savings are the difference between disposable income and consumption.
    • National income is the total reward for economic unit efforts.
    • Savings = Disposable Income - Consumption
    • The level of savings depends on income; as income increases, so does the potential for savings, but less proportionally.
    • The relationship between income and savings is called the propensity to save; S = F(Y).
    • Average Propensity to Save (APS) is the proportion of disposable income that is saved (S/Y).
    • Marginal Propensity to Save (MPS) measures how much additional disposable income is saved (ΔS/ ΔY).
    • Investment is the addition to the stock of physical capital through the purchase of capital goods.
    • Investment includes fixed investment (machinery), inventory investment (goods/materials), and replacement investment (replacing worn-out goods).
    • Autonomous investment is unaffected by income changes; it's driven by government and includes things like power, transport and communication.
    • Induced investment is affected by income; as income increases, so does induced investment.

    Acceleration Theory of Investment

    • Investment increases when income/consumption increases.
    • The greater the increase in income/consumption, the larger increase in investment, which is called acceleration.
    • Investment is linked to capital-output ratio (V).
    • V = Capital Output Ratio (magnitude of acceleration)
    • K = Stock of Capital

    Marginal Efficiency of Capital (MEC)

    • Investment is undertaken when expected returns exceed the costs.
    • Factors for investment consideration include: cost of capital, expected rate of return, and market interest rates.
    • Marginal efficiency of capital is the highest expected rate of return from an additional unit of capital asset.
    • The rate of return is determined using the present value of the stream of returns.

    The IS-LM Framework

    • The IS-LM model shows the relationship between investment and savings, product market equilibrium and money market equilibrium; it models how national income and interest rates are determined.
    • The relationship between saving/investment and the money supply/demand is key.
    • The IS-LM model shows how interest rates and total outputs are determined.
    • The Savings curve increases as income increases.
    • Investment depends on the interest rate and income level.

    The Paradox of Thrift

    • Thriftiness (saving more) is seen as virtue.
    • Increased savings may lead to reduced income and employment overall.
    • Increased savings may not lead to investment; it can become a public vice.

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    Related Documents

    Module 3 Savings and Investment PDF

    Description

    This quiz covers the key concepts of savings and investment as presented in Module 3. It explores the relationship between income and savings, as well as the different types of investments and their impacts on the economy. Test your understanding of average propensity to save, marginal propensity to save, and the overall importance of the banking sector.

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