Question

Which of the following is true?

M1 includes M2 plus some other deposits.
If consumption is an increasing function of disposable income and a decreasing function of the real interest rate, then a decrease in the incentives to invest will increase the equilibrium real interest rate in a closed economy.
All else equal, if the marginal propensity to consume is greater than 0 and less than 1 , a $50 million decrease in tax revenue will decrease national saving by more than $50 million.
None of the other answers is correct.

Which of the following is true?
All else equal, excess saving by oil-producing countries in the Middle East will result in an increase in the real interest rate in the U.S.
All else equal, when government spending and tax revenue DECREASE by the SAME amount in a closed economy, where the marginal propensity to consume is less that 1 , then the equilibrium real interest rate will decrease.
Private saving is a stock variable.
None of the other answers is correct.

Which of the following is true?
All else equal, an increase in the currency-deposit ratio will cause an increase in the money multiplier.
None of the other answers is correct.
The basket of goods and services used to estimate the 2021 GDP deflator is the same as the one used to estimate the 2020 GDP deflator.
Vault cash (i.e., cash in bank vaults) is part of M1.

Answer 1

The consumption function demonstrates how consumption expenditures increase with national income, guided by the marginal propensity to consume (MPC) and the marginal propensity to save (MPS), which together equal one. These concepts are vital for understanding economic activity and the impact of government policies.

Step-by-step explanation:

The consumption function illustrates the relationship between national income and consumption expenditures, indicating how consumption expenditures increase as national income rises. The key concepts involved are the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These propensities reflect the proportions of an additional dollar of income that are devoted to consumption and saving, respectively. It is a fundamental principle in economics that the MPC and MPS must add up to one (MPC + MPS = 1).

In a broader economic context, the MPC affects the steepness of the consumption function, with a higher MPC indicating a steeper increase in consumption as income rises. The MPS, on the other hand, represents the proportion of income saved, which is also critical for understanding national savings, investment, and interest rates. These concepts are integral to analyzing the impact of government policies on the economy, investment decisions, and the overall level of economic activity.