CA Foundation · Business Economics · Determination of National Income
In the Keynesian consumption function C = a + bY, where 'a' is a positive constant, what does the value of 'a' represent?
The constant 'a' is autonomous consumption: the spending that takes place even when income is zero, funded by past savings or borrowing. It does not depend on income. The income-dependent part is bY, where b is the marginal propensity to consume.
- AConsumption that occurs even when income is zeroCorrect
- BThe proportion of additional income that is saved
- CThe change in consumption per unit change in investment
- DThe ratio of total consumption to total income
Explanation
In C = a + bY, 'a' is autonomous consumption, the amount spent even when income is zero, financed by past savings or borrowing. The term 'b' is the MPC. The proportion of extra income saved is the MPS, which is 1 - b, so the second option confuses 'a' with the MPS.
Did you get it right without looking?
One question tells you little. A timed set on Determination of National Income shows your real accuracy, how long you take and where you lose marks.
More Determination of National Income questions
- Which of the following is the correct relationship between GDP at market prices and GDP at factor cost?
- A small economy produces only rice. In the base year it produced 200 tonnes at ₹20,000 per tonne. In the current year it produced 220 tonnes…
- In a simple two-sector economy, the marginal propensity to consume (MPC) is 0.75. If autonomous investment rises by ₹200 crore, by how much …
- The GDP deflator for an economy is defined as the ratio of:
- In an economy, nominal GDP in the current year is ₹990 crore and the GDP deflator is 110 (base year = 100). What is the real GDP for the cur…
- Which of the following is most likely to cause an upward parallel shift of the entire consumption function, rather than a movement along it?