The average propensity to consume is measured by
- A. C/YCorrect
- B. CxY
- C. Y/C
- D. C+Y
Explanation. The average propensity to consume is the ratio of consumption expenditure to any particular level of income, represented as APC = C/Y.
12th Standard Economics — Consumption and Investment Functions: Book Back MCQs with Answers & Explanations
Every Book Back multiple-choice question from Consumption and Investment Functions (12th Standard Economics, Samacheer Kalvi) — each with the correct option highlighted and a clear, worked explanation. Free to read in English and Tamil.
Answer key at a glance
An increase in the marginal propensity to consume will:
- A. Lead to consumption function becoming steeperCorrect
- B. Shift the consumption function upwards
- C. Shift the consumption function downwards
- D. Shift savings function upwards
Explanation. The marginal propensity to consume represents the slope of the consumption line. Therefore, an increase in MPC makes the consumption function steeper.
If the Keynesian consumption function is C=10+0.8 Y then, if disposable income is Rs 1000, what is amount of total consumption?
- A. ₹ 0.8
- B. ₹ 800
- C. ₹ 810Correct
- D. ₹ 0.81
Explanation. Using the given consumption function C = 10 + 0.8Y, we substitute the disposable income Y = 1000 to get C = 10 + 0.8(1000) = 810.
If the Keynesian consumption function is C=10+0.8Y then, when disposable income is Rs 100, what is the marginal propensity to consume?
- A. ₹ 0.8Correct
- B. ₹ 800
- C. ₹ 810
- D. ₹ 0.81
Explanation. In the linear consumption equation C = a + bY, the coefficient 'b' represents the marginal propensity to consume, which is 0.8 (written here as ₹ 0.8).
If the Keynesian consumption function is C=10+0.8 Y then, and disposable income is ₹100, what is the average propensity to consume?
- A. ₹ 0.8
- B. ₹ 800
- C. ₹ 810
- D. ₹0.9Correct
Explanation. Total consumption at Y = 100 is C = 10 + 0.8(100) = 90. The average propensity to consume is calculated as C/Y, which is 90/100 = 0.9.
As national income increases
- A. The APC falls and gets nearer in value to the MPC.Correct
- B. The APC increases and diverges in value from the MPC.
- C. The APC stays constant
- D. The APC always approaches infinity.
Explanation. Keynes's psychological law states that as income rises, consumption increases but by less, causing the average propensity to consume to fall and approach MPC.
As increase in consumption at any given level of income is likely to lead
- A. Higher aggregate demandCorrect
- B. An increase in exports
- C. A fall in taxation revenue
- D. A decrease in import spending
Explanation. Consumption is the largest private component of aggregate demand. An increase in consumption expenditure directly leads to higher aggregate demand in the economy.
Lower interest rates are likely to :
- A. Decrease in consumption
- B. increase cost of borrowing
- C. Encourage saving
- D. increase borrowing and spendingCorrect
Explanation. Lower interest rates reduce the cost of credit, encouraging households and business firms to increase their borrowing, consumption, and investment spending.
The MPC is equal to :
- A. Total spending / total consumption
- B. Total consumption/total income
- C. Change in consumption /change in incomeCorrect
- D. none of the above.
Explanation. The marginal propensity to consume measures the responsiveness of consumption to changes in income, defined algebraically as \(\Delta C / \Delta Y\).
The relationship between total spending on consumption and the total income is the ___________________
- A. Consumption functionCorrect
- B. Savings function
- C. Investment function
- D. aggregate demand function
Explanation. The consumption function or propensity to consume refers to the functional relationship between total consumption spending and national income.
The sum of the MPC and MPS is _______
- A. 1Correct
- B. 2
- C. 0.1
- D. 1.1
Explanation. Since national income is either consumed or saved, any incremental change in income is divided between consumption and saving, making MPC + MPS = 1.
As income increases, consumption will _________
- A. fall
- B. not change
- C. fluctuate
- D. increaseCorrect
Explanation. According to Keynes's psychological law, an increase in national income always leads to an increase in total consumption expenditure, but by a smaller amount.
When investment is assumed autonomous the slope of the AD schedule is determined by the _____
- A. marginal propensity to invest
- B. disposable income
- C. marginal propensity to consumeCorrect
- D. average propensity to consume
Explanation. When investment is autonomous, the slope of aggregate demand is entirely determined by the consumption function's slope, which is the marginal propensity to consume.
The multiplier tells us how much __________ changes after a shift in _____
- A. Consumption , income
- B. investment, output
- C. savings, investment
- D. output, aggregate demandCorrect
Explanation. The investment multiplier measures the relationship between an initial shift in autonomous aggregate demand and the resulting larger change in total national output.
The multiplier is calculated as
- A. 1/(1-MPC)
- B. 1/MPS
- C. 1/MPC
- D. a and bCorrect
Explanation. The multiplier is mathematically defined as the reciprocal of the marginal propensity to save, which can be expressed as either 1/MPS or 1/(1-MPC).
If the MPC is 0.5, the multiplier is ____________
- A. 2Correct
- B. 1/2
- C. 0.2
- D. 20
Explanation. The multiplier is calculated as the reciprocal of one minus the marginal propensity to consume. With a marginal propensity to consume of 0.5, the formula yields a multiplier value of 2.
In an open economy import _________ the value of the multiplier
- A. ReducesCorrect
- B. increase
- C. does not change
- D. changes
Explanation. In an open economy, imports represent a leakage from the domestic circular flow of income because money spent on imported goods goes abroad, thereby reducing the domestic multiplier effect.
According to Keynes, investment is a function of the MEC and _____
- A. Demand
- B. Supply
- C. Income
- D. Rate of interestCorrect
Explanation. Keynesian investment theory states that private investment is determined by comparing the expected profitability of capital, known as the marginal efficiency of capital, with the prevailing market rate of interest.
The term super multiplier was first used by
- A. J.R. HicksCorrect
- B. R.G.D. Allen
- C. Kahn
- D. Keynes
Explanation. The concept of the super multiplier, which models the total effect of initial investment by combining both induced consumption and induced investment, was first introduced by J.R. Hicks.
The term MEC was introduced by
- A. Adam Smith
- B. J.M. KeynesCorrect
- C. Ricardo
- D. Malthus
Explanation. John Maynard Keynes first introduced the concept of the Marginal Efficiency of Capital in 1936 as a primary determinant of autonomous investment in macroeconomics.
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About these Consumption and Investment Functions questions
These are the Book Back multiple-choice questions for Consumption and Investment Functions from the Tamil Nadu State Board (Samacheer Kalvi) 12th Standard Economics syllabus. Each question shows the correct option and an original, step-by-step explanation so you understand the method, not just the answer. Use the answer key above to jump to any question, then take the practice test to check yourself under exam-like conditions.
Frequently asked questions
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This chapter has 20 book-back multiple-choice questions, each with the correct answer and a step-by-step explanation.
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Yes. Every question, answer and explanation here is free, and you can also take them as a timed practice test.
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