MULTIPLE CHOICE QUESTIONS TESTBANK –

CHAPTER 17
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Answer the following questions by selecting the appropriate answer from the list below.

Question 1
Which of the following options is/are true? At the equilibrium level of national income:
i. aggregate spending equals aggregate production.
ii. aggregate spending equals aggregate income.
iii. aggregate income equals aggregate production.
iv. aggregate income equals aggregate production, but the level of aggregate spending is
irrelevant.
A. i
B. ii
C. iii
D. i, ii and iii
E. i and iv

Question 2
In the simplest (or introductory) form of the Keynesian model, which of the following decisions can
we analyse?
A. Interest rate fluctuations.
B. Saving of households.
C. Investment by government.
D. Foreign investment by firms.
E. Wage levels in firms.

Question 3
Which of the following statements is/are true? If aggregate expenditure is equal to total income, this
means:
i. nothing, because they are always equal by definition.
ii. the economy is in equilibrium.
iii. inventories will remain at their planned levels.
iv. investment will decrease to run down inventories.
v. investment will increase to build up inventories.

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 A. i
B. iii
C. ii and iii
D. iv
E. v

Question 4
Equilibrium refers to a situation where:
A. the key quantities are equal.
B. all the variables balance out, i.e., their sum is zero.
C. all resources are fully employed.
D. no participant in the process desires to change his or her behaviour.
E. production equals income.

Question 5
According to the Keynesian model, the most important determinant of a household’s consumption
is:
A. its disposable income.
B. its total wealth.
C. the number of persons in the household.
D. its net wealth.
E. the ratio of wage to non-wage income the household earns.

Question 6
Which of the following statements is/are true?
i. The level of autonomous consumption is determined in part by the level of wealth.
ii. The level of induced consumption is determined by the level of wealth.
iii. The level of induced consumption is determined by the level of income.
iv. The level of consumption is determined only by the level of induced consumption.

A. i
B. ii
C. i and ii
D. i and iii
E. i, iii and iv

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Question 7
The MPC measures the relationship between:

A. a change in consumption and a change in income.

B. change in consumption and savings.
C. changes in consumption and changes in savings.
D. the proportion of income to consumption at any given level of income.
E. the total level of consumption and the total level of saving.

Question 8
If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to
R15 000, then its:
A. marginal propensity to consume is –0,67.
B. marginal propensity to consume is 0,88.
C. marginal propensity to consume is 0,20.
D. marginal propensity to save is zero.
E. marginal propensity to save is 0,12.

Question 9
Which one of the following is not a component of aggregate expenditure?
A. Consumers’ expenditure
B. Investment
C. Autonomous consumption
D. Induced consumption
E. Saving

Question 10
If you examine the national accounts, you will see that saving always equals investment. This is
because:
A. households can invest only what they save.
B. investment by firms is restricted by the amount of saving.
C. saving always equals investment ex post (in an accounting sense).
D. saving includes unplanned changes in inventories.
E. the economy rapidly adjusts the level of investment to saving.

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Question 11
Given a particular aggregate expenditure function, which of the following must be true if the
prevailing level of income is greater than planned aggregate expenditure?
A. Firms’ inventories are falling unintentionally.
B. Firms’ inventories are increasing unintentionally.
C. The aggregate expenditure function will shift downward.
D. Businesses will increase production.
E. Real GDP will rise from the prevailing level to the equilibrium level.

Question 12
If real gross domestic product is R500 billion and planned aggregate expenditure is R458 billion, then
inventories will:
A. pile up and output will decrease.
B. pile up and output will increase.
C. be depleted and output will decrease.
D. be depleted and output will increase.
E. stay constant, as will output.

Question 13
If aggregate expenditure is greater than total income:
A. investment will decrease because such a high level cannot be sustained.
B. planned saving will decrease in line with investment.
C. output will increase to replenish depleted inventories.
D. investment will decrease to run down excessive inventories.
E. there is an error, since the two are the same by definition.

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Question 14
Consider the following diagram. Use this information to answer Questions (a) to (c).

Question (a)
The point labelled A2 represents:
A. autonomous consumption.
B. autonomous investment.
C. induced consumption.
D. equilibrium consumption.
E. autonomous spending.

Question (b)
The gap labelled W represents:
A. autonomous consumption.
B. investment spending.
C. induced consumption.
D. autonomous spending.
E. none of the above.

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 Question (c)
Which of the following statements is/are true of the situation depicted in the diagram?
i. Y1 represents the equilibrium level of consumption.
ii. All points on the line labelled A=Y show where spending equals income.
iii. Y2 represents the equilibrium level of output.
iv. W equals the equilibrium level of savings.

A. i
B. ii, iii and iv
C. ii and iii
D. iii
E. ii

Question 15
The multiplier in the Keynesian model equals:
A. the equilibrium level of income for a given level of aggregate expenditure.
B. the increase in autonomous expenditure brought about by a change in income.
C. the equilibrium level of income divided by autonomous expenditure.
D. the increase in equilibrium income when autonomous expenditure increases.
E. the level of equilibrium output corresponding to a given level of aggregate spending.

Question 16
In the Keynesian model the multiplier is equal to:
A. the equilibrium level of output for a given level of aggregate expenditure.
B. the increase in aggregate expenditure brought about by a change in investment.
C. the increase in the equilibrium level of income divided by the change in autonomous
expenditure.
D. the increase in autonomous expenditure when equilibrium income increases.
E. the equilibrium level of consumption corresponding to a given level of aggregate spending.

Question 17
The multiplier in the simple Keynesian model of this chapter shows:
A. the increase in investment which will accompany a change in income.
B. the increase in autonomous consumption brought about by a change in income.
C. the change in income divided by the change in investment.
D. the increase in economic growth when autonomous expenditure increases.
E. the level of equilibrium output corresponding to a given level of aggregate spending.

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Question 18
Consider the following diagram. Use this information to answer Questions (a) to (c).

Question (a)
Autonomous consumption equals:
A. R0
B. R4 million
C. R10 million
D. R16 million
E. R40 million

Question (b)
Investment equals:
A. R4 million
B. R10 million
C. R12 million
D. R16 million
E. R40 million

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 Question (c)
The equilibrium level of saving equals:
A. R4 million
B. R10 million
C. R12 million
D. R16 million
E. R40 million

Question 19
Consider the following diagram and answer the question below.

Which one of the following statements is false?

A. Y1 represents the equilibrium level of income.
B. The curve labelled A = C + I shows the total of consumption and investment spending.
C. The curve labelled C shows the total of autonomous and induced consumption spending.
D. The point labelled D shows where saving equals investment.
E. The point labelled E shows where planned investment equals actual investment.

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Question 20
Consider the following information:
 Marginal propensity to consume = 0,9
 Investment = R200 million
 Autonomous consumption = R70 million

The equilibrium level of income is

A. R300 million
B. R700 million
C. R2 000 million
D. R2 700 million
E. impossible to determine from the information provided

Question 21
In the Keynesian model, unemployment can be reduced by:
A. increasing the level of saving, and hence investment.
B. decreasing the level of saving, ceteris paribus.
C. persuading households to reduce their consumption.
D. raising the interest rate.
E. none of the above, since it is not part of the model.

Question 22
Which one of the following statements is correct?

A. In macro-economic theory, total production is synonymous with total income.

B. Macro-economic theory deals with events that happened in the past.
C. With the help of macro-economic theory, a precise version of reality can be constructed.

Question 23
Which one of the following factors will NOT increase the level of autonomous consumption?

A. An increase in income.
B. A decrease in the interest rate.
C. An increase in the value of shares.

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Question 24
Which one of the following can be regarded as part of investment spending in the simple Keynesian
model?

A. Savings of households.
B. Buying of Anglo American shares on the stock exchange.
C. Buying of bonds by a business.
D. Building a new factory.

Question 25
Which one of the following is not a basic aim of macroeconomic theory?

A. To describe all the detail pertaining to a specific situation in the economy.

B. To explain how the economy functions.
C. To predict what will happen if something changes.
D. To assist policymakers by analysing economic policy.

Question 26
Which one of the following statements is incorrect?

A. Theories are sometimes also called models.

B. In macroeconomic theory we deal only with real-world variables, such as GDP and the CPI.
C. All theories or models are simplifications of reality.
D. The simple Keynesian model is named after the British economist, John Maynard Keynes.
E. The national accounts are concerned with measurement, not explanation.

Question 27
In macroeconomic theory:

A. total production is always equal to total income.

B. total production is always greater than total income.
C. total production is always less than total income.
D. total production may be greater than total income.
E. total production may be less than total income.

Question 28
In the national accounts:

A. total production is always equal to total income.

B. total production is always greater than total income.
C. total production is always less than total income.
D. total production may be greater than total income.

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 E. total production may be less than total income.

Question 29
In macroeconomic theory:

A. total spending is always equal to total production and income.

B. total spending is always greater than total production and income.
C. total spending is always less than total production and income.
D. total spending may be less than total production and income.

Question 30
In the national accounts:

A. total spending is always equal to total production and income.

B. total spending is always greater than total production and income.
C. total spending is always less than total production and income.
D. total spending may be less than total production and income.

Question 31
In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate
production of income by Y. Which one of the following statements is incorrect?

A. When A is greater than Y, there is disequilibrium and Y will tend to increase.

B. When A is equal to Y, there is equilibrium and Y will remain unchanged.
C. When A is less than Y, there is disequilibrium and Y will decrease.
D. When A is greater than Y, there is disequilibrium and A will decrease.
E. When A is less than Y, producers will have an incentive to cut back on their production.

Question 32
Which one of the following statements is incorrect?

A. When A is greater than Y, inventories will decrease.

B. When A is greater than Y, production will decrease.
C. When A is equal to Y, inventories will remain unchanged.
D. An increase in inventories acts as a signal to producers to cut back on their production.
E. A decrease in inventories acts as a signal to producers to expand their production.

Question 33
Which one of the following is not an assumption of the simple Keynesian model?

A. Prices are given.

B. Interest rates are given.

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 C. Wages are given.
D. The money stock is given.
E. Production (supply) is the driving force that determines the level of economic activity.

Question 34
Which one of the following statements is incorrect? In a simple Keynesian model without a
government and a foreign sector:

A. aggregate spending A consists of consumption spending C and investment spending I.

B. C depends largely on total income.
C. I represents spending on capital goods.
D. I depends largely on total production and income Y.
E. there is equilibrium when A = Y.

Question 35
Which one of the following statements about consumption spending is incorrect?

A. Spending on non-durable goods such as food is the most stable component of consumption
spending.
B. Spending on durable goods is the most erratic or volatile component of consumption
spending.
C. Consumption spending is determined largely by total income in the economy.
D. Part of consumption spending consists of spending on services.
E. There is a strong inverse relationship between consumption spending and total income in
the economy.

Question 36
Which one of the following statements about the consumption function is incorrect?

A. Consumption spending cannot be positive if income is zero.

B. Consumption spending increases as income increases.
C. Consumption spending decreases as income decreases.
D. When income increases, consumption increases, but by less than the increase in income –
part of the additional income is saved.
E. Autonomous consumption is that part of consumption spending which is independent of
the level of income.

Question 37
Which one of the following statements about the consumption function is incorrect?

A. Consumption spending consists of autonomous consumption and induced consumption.

B. Autonomous consumption consists largely of spending on durable consumer goods.

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 C. Autonomous consumption is independent of the level of income.
D. As income increases, the level of induced consumption increases.

Question 38
Which one of the following statements about the consumption function is incorrect?

A. The consumption function has a positive slope.

B. The slope of the consumption function is determined by the level of autonomous
consumption.
C. The slope of the consumption function is equal to the marginal propensity to consume.
D. The slope of the consumption function relates to induced consumption.
E. The marginal propensity to consume is the ratio between a change in consumption and the
corresponding change in income.

Question 39
Which one of the following statements about the consumption function is incorrect?

A. The intercept of the consumption function is determined by the level of induced

consumption.
B. The value of induced consumption depends, inter alia, on the marginal propensity to
consume.
C. The value of induced consumption depends, inter alia, on the level of income.
D. The position of the consumption function is determined by autonomous consumption.
E. Autonomous consumption is independent of the level of income.

Question 40
Which one of the following statements is incorrect?

A. The level of autonomous consumption is determined by the non-income determinants of

consumption spending.
B. The impact of a change in one or more of the non-income determinants of consumption
can be illustrated by a shift of the consumption function.
C. The level of autonomous consumption determines the position of the consumption
function.
D. Investment spending is the most stable component of aggregate spending in the economy.
E. Investment spending relates to capital as a factor of production.

Question 41
Which one of the following is not an important element of the investment decision?

A. The cost of capital goods.

B. The level of total income in the economy (Y).

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 C. The interest rate.
D. The expected revenue from the investment project.
E. The expected return on the investment project.

Question 42
Which one of the following statements about the 45-degree line is incorrect?

A. The 45-degree line indicates all the points where the level of aggregate spending (A) is
equal to the level of aggregate income (Y).
B. The 45-degree line indicates all the possible equilibrium points.
C. Any point above the 45-degree line indicates an excess demand for goods and services.
D. Any point below the 45-degree line indicates an excess supply of goods and services.
E. At the point where the aggregate spending function intersects the 45-degree line, there is
an excess supply of goods and services.

Question 43
The 45-degree line:

A. illustrates the level of autonomous consumption.

B. illustrates the level of induced consumption.
C. illustrates the level of investment spending.
D. illustrates the combined level of consumption and investment spending.
E. illustrates all the possible equilibrium points, where the level of aggregate spending equals
the level of total income in the economy.

Question 44
At the equilibrium level of income in the economy:

A. there is an unplanned decrease in inventories.

B. there is an unplanned increase in inventories.
C. there is no unplanned change in inventories.
D. aggregate spending is greater than aggregate income.
E. aggregate spending is less than aggregate income.

Question 45
Which one of the following statements is incorrect?

When aggregate spending A is greater than total production or income Y:

A. firms experience an unplanned decrease in their inventories.

B. current production is insufficient to meet the demand for goods and services.
C. income is not at its equilibrium level.
D. there is no incentive for firms to expand their production.

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 E. production has to expand to restore equilibrium.

Question 46
Which one of the following is not required to calculate the equilibrium level of income in a simple
Keynesian model?

A. The marginal propensity to consume.

B. The level of autonomous consumption.
C. The size of the money stock.
D. The level of investment spending.
E. The equilibrium condition.

Question 47
Consider the following information: autonomous consumption spending is R50 million, investment
spending is R150 million and the marginal propensity to consume is 0,80. Which one of the following
statements is correct?

A. The equilibrium level of income is R200 million.

B. The multiplier is 1,25.
C. The equilibrium level of income is R1 billion.
D. The multiplier is 4.
E. The equilibrium level of income is R250 million.

Question 48
Which one of the following statements about a simple Keynesian model without a government or
foreign sector is incorrect?

A. The greater the value of the marginal propensity to consume, the greater the value of the
multiplier becomes.
B. The size of the multiplier depends on the size of the marginal propensity to consume.
C. If the marginal propensity to consume is 0,75, then a R10 million increase in investment
spending will raise the equilibrium level of income by R7.5 million.
D. If the marginal propensity to consume is 0,6, then a R100 million increase in investment
spending will raise the equilibrium level of income by R250 million.
E. The equilibrium level of income can be obtained by multiplying the level of autonomous
spending by the multiplier.

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Question 49
Which one of the following statements is correct?

A. In macroeconomic theory investment refers to the total flow of funds through the financial
institutions.
B. Macroeconomic theory deals with events that occurred in the past.
C. Induced consumption refers to that part of consumption spending that does not change as
income changes.
D. If the marginal propensity to consume is 0,9 and the income level is 200, then the level of
induced consumption is 180.
E. Income is the most important determinant of the level of investment.

Question 50
Which one of the following statements is incorrect?

In a simple Keynesian model without a government and a foreign sector:

A. if autonomous consumption is R30 billion, investment spending is R25 billion and the slope
of the consumption function is 0,8, then the equilibrium level of income is R275 billion.
B. if autonomous consumption is R65 billion, investment spending is R31 billion and the
marginal propensity to consume is 0,75, then the equilibrium level of income is R128
billion.
C. if investment spending is R45 billion, autonomous consumption is R5 billion and the slope
of the consumption function is 0,9, then the equilibrium level of income is R500 billion.
D. if autonomous consumption is R10 billion, investment spending is R20 billion and the
marginal propensity to consume is 0,6, then the equilibrium level of income is R75 billion.

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 MULTIPLE CHOICE QUESTIONS TESTBANK –
CHAPTER 18
MEMORANDUM
Go back to Multiple Choice Questions
Answer the following questions by selecting the appropriate answer from the list below.

Question 1
Which of the following options is/are true? At the equilibrium level of national income:
i. aggregate spending equals aggregate production.
ii. aggregate spending equals aggregate income.
iii. aggregate income equals aggregate production.
iv. aggregate income equals aggregate production, but the level of aggregate spending
is irrelevant.
A. i
B. ii
C. iii
D. i, ii and iii
E. i and iv

Question 2
In the simplest (or introductory) form of the Keynesian model, which of the following decisions can
we analyse?
A. Interest rate fluctuations.
B. Saving of households.
C. Investment by government.
D. Foreign investment by firms.
E. Wage levels in firms.

Question 3
Which of the following statements is/are true? If aggregate expenditure is equal to total income, this
means:
i. nothing, because they are always equal by definition.
ii. the economy is in equilibrium.
iii. inventories will remain at their planned levels.

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 iv. investment will decrease to run down inventories.
v. investment will increase to build up inventories.

A. i
B. iii
C. ii and iii
D. iv
E. v

Question 4
Equilibrium refers to a situation where:
A. the key quantities are equal.
B. all the variables balance out, i.e., their sum is zero.
C. all resources are fully employed.
D. no participant in the process desires to change his or her behaviour.
E. production equals income.

Question 5
According to the Keynesian model, the most important determinant of a household’s consumption
is:
A. its disposable income.
B. its total wealth.
C. the number of persons in the household.
D. its net wealth.
E. the ratio of wage to non-wage income the household earns.

Question 6
Which of the following statements is/are true?
i. The level of autonomous consumption is determined in part by the level of wealth.
ii. The level of induced consumption is determined by the level of wealth.
iii. The level of induced consumption is determined by the level of income.
iv. The level of consumption is determined only by the level of induced consumption.

A. i
B. ii
C. i and ii
D. i and iii
E. i, iii and iv

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Question 7
The MPC measures the relationship between:

A. a change in consumption and a change in income.

B. change in consumption and savings.
C. changes in consumption and changes in savings.
D. the proportion of income to consumption at any given level of income.
E. the total level of consumption and the total level of saving.

Question 8
If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to
R15 000, then its:
A. marginal propensity to consume is –0,67.
B. marginal propensity to consume is 0,88.
C. marginal propensity to consume is 0,20.
D. marginal propensity to save is zero.
E. marginal propensity to save is 0,12.

Question 9
Which one of the following is not a component of aggregate expenditure?
A. Consumers’ expenditure
B. Investment
C. Autonomous consumption
D. Induced consumption
E. Saving

Question 10
If you examine the national accounts, you will see that saving always equals investment. This is
because:
A. households can invest only what they save.
B. investment by firms is restricted by the amount of saving.
C. saving always equals investment ex post (in an accounting sense).
D. saving includes unplanned changes in inventories.
E. the economy rapidly adjusts the level of investment to saving.

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Question 11
Given a particular aggregate expenditure function, which of the following must be true if the
prevailing level of income is greater than planned aggregate expenditure?
A. Firms’ inventories are falling unintentionally.
B. Firms’ inventories are increasing unintentionally.
C. The aggregate expenditure function will shift downward.
D. Businesses will increase production.
E. Real GDP will rise from the prevailing level to the equilibrium level.

Question 12
If real gross domestic product is R500 billion and planned aggregate expenditure is R458 billion, then
inventories will:
A. pile up and output will decrease.
B. pile up and output will increase.
C. be depleted and output will decrease.
D. be depleted and output will increase.
E. stay constant, as will output.

Question 13
If aggregate expenditure is greater than total income:
A. investment will decrease because such a high level cannot be sustained.
B. planned saving will decrease in line with investment.
C. output will increase to replenish depleted inventories.
D. investment will decrease to run down excessive inventories.
E. there is an error, since the two are the same by definition.

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Question 14
Consider the following diagram. Use this information to answer Questions (a) to (c).

Question (a)
The point labelled A2 represents:
A. autonomous consumption.
B. autonomous investment.
C. induced consumption.
D. equilibrium consumption.
E. autonomous spending.

Question (b)
The gap labelled W represents:
A. autonomous consumption.
B. investment spending.
C. induced consumption.
D. autonomous spending.
E. none of the above.

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 Question (c)
Which of the following statements is/are true of the situation depicted in the diagram?
i. Y1 represents the equilibrium level of consumption.
ii. All points on the line labelled A=Y show where spending equals income.
iii. Y2 represents the equilibrium level of output.
iv. W equals the equilibrium level of savings.

A. i
B. ii, iii and iv
C. ii and iii
D. iii
E. ii

Question 15
The multiplier in the Keynesian model equals:
A. the equilibrium level of income for a given level of aggregate expenditure.
B. the increase in autonomous expenditure brought about by a change in income.
C. the equilibrium level of income divided by autonomous expenditure.
D. the increase in equilibrium income when autonomous expenditure increases.
E. the level of equilibrium output corresponding to a given level of aggregate spending.

Question 16
In the Keynesian model the multiplier is equal to:
A. the equilibrium level of output for a given level of aggregate expenditure.
B. the increase in aggregate expenditure brought about by a change in investment.
C. the increase in the equilibrium level of income divided by the change in autonomous
expenditure.
D. the increase in autonomous expenditure when equilibrium income increases.
E. the equilibrium level of consumption corresponding to a given level of aggregate spending.

Question 17
The multiplier in the simple Keynesian model of this chapter shows:
A. the increase in investment which will accompany a change in income.
B. the increase in autonomous consumption brought about by a change in income.
C. the change in income divided by the change in investment.
D. the increase in economic growth when autonomous expenditure increases.
E. the level of equilibrium output corresponding to a given level of aggregate spending.

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Question 18
Consider the following diagram. Use this information to answer Questions (a) to (c).

Question (a)
Autonomous consumption equals:
A. R0
B. R4 million
C. R10 million
D. R16 million
E. R40 million

Question (b)
Investment equals:
A. R4 million
B. R10 million
C. R12 million
D. R16 million
E. R40 million

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 Question (c)
The equilibrium level of saving equals:
A. R4 million
B. R10 million
C. R12 million
D. R16 million
E. R40 million

Question 19
Consider the following diagram and answer the question below.

Which one of the following statements is false?

A. Y1 represents the equilibrium level of income.
B. The curve labelled A = C + I shows the total of consumption and investment spending.
C. The curve labelled C shows the total of autonomous and induced consumption spending.
D. The point labelled D shows where saving equals investment.
E. The point labelled E shows where planned investment equals actual investment.

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Question 20
Consider the following information:
 Marginal propensity to consume = 0,9
 Investment = R200 million
 Autonomous consumption = R70 million

The equilibrium level of income is

A. R300 million
B. R700 million
C. R2 000 million
D. R2 700 million
E. impossible to determine from the information provided

Question 21
In the Keynesian model, unemployment can be reduced by:
A. increasing the level of saving, and hence investment.
B. decreasing the level of saving, ceteris paribus.
C. persuading households to reduce their consumption.
D. raising the interest rate.
E. none of the above, since it is not part of the model.

Question 22
Which one of the following statements is correct?

A. In macro-economic theory, total production is synonymous with total income.

B. Macro-economic theory deals with events that happened in the past.
C. With the help of macro-economic theory, a precise version of reality can be constructed.

Question 23
Which one of the following factors will NOT increase the level of autonomous consumption?

A. An increase in income.
B. A decrease in the interest rate.
C. An increase in the value of shares.

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Question 24
Which one of the following can be regarded as part of investment spending in the simple Keynesian
model?

A. Savings of households.
B. Buying of Anglo American shares on the stock exchange.
C. Buying of bonds by a business.
D. Building a new factory.

Question 25
Which one of the following is not a basic aim of macroeconomic theory?

A. To describe all the detail pertaining to a specific situation in the economy.

B. To explain how the economy functions.
C. To predict what will happen if something changes.
D. To assist policymakers by analysing economic policy.

Question 26
Which one of the following statements is incorrect?

A. Theories are sometimes also called models.

B. In macroeconomic theory we deal only with real-world variables, such as GDP and the CPI.
C. All theories or models are simplifications of reality.
D. The simple Keynesian model is named after the British economist, John Maynard Keynes.
E. The national accounts are concerned with measurement, not explanation.

Question 27
In macroeconomic theory:

A. total production is always equal to total income.

B. total production is always greater than total income.
C. total production is always less than total income.
D. total production may be greater than total income.
E. total production may be less than total income.

Question 28
In the national accounts:

A. total production is always equal to total income.

B. total production is always greater than total income.
C. total production is always less than total income.
D. total production may be greater than total income.

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 E. total production may be less than total income.

Question 29
In macroeconomic theory:

A. total spending is always equal to total production and income.

B. total spending is always greater than total production and income.
C. total spending is always less than total production and income.
D. total spending may be less than total production and income.

Question 30
In the national accounts:

A. total spending is always equal to total production and income.

B. total spending is always greater than total production and income.
C. total spending is always less than total production and income.
D. total spending may be less than total production and income.

Question 31
In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate
production of income by Y. Which one of the following statements is incorrect?

A. When A is greater than Y, there is disequilibrium and Y will tend to increase.

B. When A is equal to Y, there is equilibrium and Y will remain unchanged.
C. When A is less than Y, there is disequilibrium and Y will decrease.
D. When A is greater than Y, there is disequilibrium and A will decrease.
E. When A is less than Y, producers will have an incentive to cut back on their production.

Question 32
Which one of the following statements is incorrect?

A. When A is greater than Y, inventories will decrease.

B. When A is greater than Y, production will decrease.
C. When A is equal to Y, inventories will remain unchanged.
D. An increase in inventories acts as a signal to producers to cut back on their production.
E. A decrease in inventories acts as a signal to producers to expand their production.

Question 33
Which one of the following is not an assumption of the simple Keynesian model?

A. Prices are given.

B. Interest rates are given.

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 C. Wages are given.
D. The money stock is given.
E. Production (supply) is the driving force that determines the level of economic activity.

Question 34
Which one of the following statements is incorrect? In a simple Keynesian model without a
government and a foreign sector:

A. aggregate spending A consists of consumption spending C and investment spending I.

B. C depends largely on total income.
C. I represents spending on capital goods.
D. I depends largely on total production and income Y.
E. there is equilibrium when A = Y.

Question 35
Which one of the following statements about consumption spending is incorrect?

A. Spending on non-durable goods such as food is the most stable component of

consumption spending.
B. Spending on durable goods is the most erratic or volatile component of consumption
spending.
C. Consumption spending is determined largely by total income in the economy.
D. Part of consumption spending consists of spending on services.
E. There is a strong inverse relationship between consumption spending and total income
in the economy.

Question 36
Which one of the following statements about the consumption function is incorrect?

A. Consumption spending cannot be positive if income is zero.

B. Consumption spending increases as income increases.
C. Consumption spending decreases as income decreases.
D. When income increases, consumption increases, but by less than the increase in income
– part of the additional income is saved.
E. Autonomous consumption is that part of consumption spending which is independent of
the level of income.

Question 37
Which one of the following statements about the consumption function is incorrect?

A. Consumption spending consists of autonomous consumption and induced consumption.

B. Autonomous consumption consists largely of spending on durable consumer goods.

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 C. Autonomous consumption is independent of the level of income.
D. As income increases, the level of induced consumption increases.

Question 38
Which one of the following statements about the consumption function is incorrect?

A. The consumption function has a positive slope.

B. The slope of the consumption function is determined by the level of autonomous
consumption.
C. The slope of the consumption function is equal to the marginal propensity to consume.
D. The slope of the consumption function relates to induced consumption.
E. The marginal propensity to consume is the ratio between a change in consumption and
the corresponding change in income.

Question 39
Which one of the following statements about the consumption function is incorrect?

A. The intercept of the consumption function is determined by the level of induced

consumption.
B. The value of induced consumption depends, inter alia, on the marginal propensity to
consume.
C. The value of induced consumption depends, inter alia, on the level of income.
D. The position of the consumption function is determined by autonomous consumption.
E. Autonomous consumption is independent of the level of income.

Question 40
Which one of the following statements is incorrect?

A. The level of autonomous consumption is determined by the non-income determinants

of consumption spending.
B. The impact of a change in one or more of the non-income determinants of consumption
can be illustrated by a shift of the consumption function.
C. The level of autonomous consumption determines the position of the consumption
function.
D. Investment spending is the most stable component of aggregate spending in the
economy.
E. Investment spending relates to capital as a factor of production.

Question 41
Which one of the following is not an important element of the investment decision?

A. The cost of capital goods.

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 B. The level of total income in the economy (Y).
C. The interest rate.
D. The expected revenue from the investment project.
E. The expected return on the investment project.

Question 42
Which one of the following statements about the 45-degree line is incorrect?

A. The 45-degree line indicates all the points where the level of aggregate spending (A) is
equal to the level of aggregate income (Y).
B. The 45-degree line indicates all the possible equilibrium points.
C. Any point above the 45-degree line indicates an excess demand for goods and services.
D. Any point below the 45-degree line indicates an excess supply of goods and services.
E. At the point where the aggregate spending function intersects the 45-degree line, there
is an excess supply of goods and services.

Question 43
The 45-degree line:

A. illustrates the level of autonomous consumption.

B. illustrates the level of induced consumption.
C. illustrates the level of investment spending.
D. illustrates the combined level of consumption and investment spending.
E. illustrates all the possible equilibrium points, where the level of aggregate spending
equals the level of total income in the economy.

Question 44
At the equilibrium level of income in the economy:

A. there is an unplanned decrease in inventories.

B. there is an unplanned increase in inventories.
C. there is no unplanned change in inventories.
D. aggregate spending is greater than aggregate income.
E. aggregate spending is less than aggregate income.

Question 45
Which one of the following statements is incorrect?

When aggregate spending A is greater than total production or income Y:

A. firms experience an unplanned decrease in their inventories.

B. current production is insufficient to meet the demand for goods and services.
C. income is not at its equilibrium level.

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 D. there is no incentive for firms to expand their production.
E. production has to expand to restore equilibrium.

Question 46
Which one of the following is not required to calculate the equilibrium level of income in a simple
Keynesian model?

A. The marginal propensity to consume.

B. The level of autonomous consumption.
C. The size of the money stock.
D. The level of investment spending.
E. The equilibrium condition.

Question 47
Consider the following information: autonomous consumption spending is R50 million, investment
spending is R150 million and the marginal propensity to consume is 0,80. Which one of the following
statements is correct?

A. The equilibrium level of income is R200 million.

B. The multiplier is 1,25.
C. The equilibrium level of income is R1 billion.
D. The multiplier is 4.
E. The equilibrium level of income is R250 million.

Question 48
Which one of the following statements about a simple Keynesian model without a government or
foreign sector is incorrect?

A. The greater the value of the marginal propensity to consume, the greater the value of
the multiplier becomes.
B. The size of the multiplier depends on the size of the marginal propensity to consume.
C. If the marginal propensity to consume is 0,75, then a R10 million increase in investment
spending will raise the equilibrium level of income by R7.5 million.
D. If the marginal propensity to consume is 0,6, then a R100 million increase in investment
spending will raise the equilibrium level of income by R250 million.
E. The equilibrium level of income can be obtained by multiplying the level of autonomous
spending by the multiplier.

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Question 49
Which one of the following statements is correct?

A. In macroeconomic theory investment refers to the total flow of funds through the
financial institutions.
B. Macroeconomic theory deals with events that occurred in the past.
C. Induced consumption refers to that part of consumption spending that does not change
as income changes.
D. If the marginal propensity to consume is 0,9 and the income level is 200, then the level
of induced consumption is 180.
E. Income is the most important determinant of the level of investment.

Question 50
Which one of the following statements is incorrect?

In a simple Keynesian model without a government and a foreign sector:

A. if autonomous consumption is R30 billion, investment spending is R25 billion and the
slope of the consumption function is 0,8, then the equilibrium level of income is R275
billion.
B. if autonomous consumption is R65 billion, investment spending is R31 billion and the
marginal propensity to consume is 0,75, then the equilibrium level of income is R128
billion.
C. if investment spending is R45 billion, autonomous consumption is R5 billion and the
slope of the consumption function is 0,9, then the equilibrium level of income is R500
billion.
D. if autonomous consumption is R10 billion, investment spending is R20 billion and the
marginal propensity to consume is 0,6, then the equilibrium level of income is R75
billion.

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