Question

a. If an economy's MPC = 0.80 and income rises by $20 billion in an economy, then consumption spending should increase by:​

a	​$6 billion.
b	$16 billion.​
c	$28 billion.​
d	$20 billion.​
e	$14 billion.

b. The market interest rate is important for firms to consider when making investment decisions:​

a	always, whether funds must be borrowed or firms have the funds on hand.​
b	only when firms have the money to invest in capital.​
c	​only when funds are borrowed from financial intermediaries.
d	only when firms have funds on hand and are ready to lend them.​
e	only when firms purchase new equipment rather than a new building.

c. An increase in the market interest rate will _____.​

a	increase investment in capital because income will increase​
b	increase investment in capital, because the rate of return on capital will be higher​
c	reduce investment in capital, because the rate of return on capital will be lower​
d	​have no effect on investment
e	reduce investment in capital, because the cost of borrowing increased

d. Each of the following will cause an increase in "I" Investment, except which one?

a	​greater rates-of-return on capital
b	decrease in savings
c	improvement in business expectations​ about profits
d	decrease in interest rate​s

e. If disposable incomes in the United States increase, then U.S. _____.​

a	exports increase
b	imports decrease and exports decrease​
c	​imports increase
d	net exports remains constant​
e	imports remain constant and exports increase

f. If disposable incomes in other countries increase, then U.S. _____.​

a	​net exports are not affected
b	exports increase and imports increase​
c	exports increase​
d	imports increase
e	imports decrease and exports decrease

Answer 1

a.

As it has been given that if an economy's MPC = 0.80 and income rises by $20 billion in an economy, then consumption spending should increase by:

=change in income * MPC

=$20*0.8

=$16 billion.

Hence option b is the correct answer.

b.

Since interest rate is the cost of borrowing for investment for machinary and plants. So with the increase in the interest rate cost of borrowing increases, therefore capital investment becomes expensive. Hence investment decreases and vice-versa in case of an increase in the interest rate.

Interest rate also affect the investment when the Entrepreneur has money in hand because money has also opportunity cost.

Hence it can be said that the market interest rate is important for firms to consider when making investment decisions always, whether funds must be borrowed or firms have the funds on hand.

Hence option a is the correct answer.

c.

Since interest rate is the cost of borrowing for investment for Machine and plants. So with the increase in the interest rate cost of borrowing increases, therefore capital investment becomes expensive. Hence investment decreases and vice-versa in case of an increase in the interest rate.

Hence it can be said that an increase in the market interest rate will reduce investment in capital, because the cost of borrowing increased.

Hence option e is the correct answer.

d.

An investment will increase when there is a greater rates of return on capital, improvement in business expectations about profits and a decrease in interest rates.

But a decrease in saving will leads to decrease in the supply of loans, so investment decreases.

Hence option b does not lead to an increase in the investment.

Hence option b is the correct answer.