Question

1. Under what circumstances would you expect the MPC to be greater than or equal to one?

2. How would you distinguish between an investment defined by an economist and an investment as defined by a stock market investor?

Answer 1

1. Circumstances:

• When in a consumer basket, high price or income elastic goods are present, rise in income cause even greater rise in consumption coming solely out of dissavings.
• When a high degree necessity is required to be consumed using both savings and income with income being less than required. A rise in income can cause sudden use of funds towards that necessity.

2.

• From point of view of an economist, an investment can be defined as purchase of capital goods or fixed assets to improve productivity or improve efficiency in the existing production process or to start a new production process.
• From point of view of stock market investor, an investment can be defined as purchase of different types of market securities like stocks, commodities, currencies in order to maximize expected future monetary wealth.

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