2.2.2 Consumption (C) Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Disposable income is best defined as:

   • total government revenue from income tax and VAT
   • income from employment only, excluding benefits and investment income
   • total household income before any taxes are deducted
   • income left for households after direct taxes have been paid and transfers received

2. The marginal propensity to consume (MPC) is:

   • the total consumption divided by total national output
   • the proportion of an extra pound of disposable income that is spent on consumption
   • the proportion of total income that households save each year
   • the change in the price of consumer goods divided by the change in income

3. The average propensity to save is:

   • total consumption divided by the total number of households
   • the change in savings divided by the change in interest rates
   • the percentage of savings that is held as cash
   • total savings divided by total disposable income

4. If disposable income rises by 100 and consumption rises by 80, the marginal propensity to save is:

   • 0.8
   • 0.5
   • 0.2
   • 1.8

5. Which factor is likely to reduce consumer spending through the interest rate channel?

   • a fall in unemployment that raises confidence about future income
   • a fall in interest rates that reduces the cost of mortgages and credit
   • a rise in interest rates that increases the cost of borrowing and the return on saving
   • a rise in the value of house prices that increases household wealth

6. The wealth effect on consumption means that:

   • a rise in the value of assets such as houses or shares can increase household spending
   • a rise in wealth always reduces spending because households save more
   • consumer spending falls whenever the stock market rises
   • consumption depends only on the level of current income, not on assets

7. Consumer confidence affects spending mainly because it:

   • fixes the marginal propensity to import in the economy, so that confident households buy more foreign goods and fewer domestic products
   • influences expectations of future income and job security, which affect how much households are willing to spend now
   • determines the level of disposable income directly through taxation
   • sets the interest rate that the central bank charges on loans

8. A household's disposable income rises from 20,000 to 22,000 and its consumption rises from 18,000 to 19,400. What is its MPC?

   • 0.7
   • 0.6
   • 0.9
   • 1.4

9. A household has disposable income of 30,000 and consumption of 27,000. What is its average propensity to save?

   • 0.3
   • 0.1
   • 3.0
   • 0.9

10. Which statement best explains the relationship between saving and consumption?

    • Households can only consume out of savings and never out of current income, so consumption depends entirely on the stock of past saving
    • Saving and consumption both rise by the same amount when disposable income rises, so the propensities to save and consume are always equal
    • Consumption is always larger than disposable income in every economy
    • Income not consumed is saved, so a rise in the propensity to save means a fall in the propensity to consume, given disposable income

11. Why might a rise in interest rates have a larger effect on consumption of households with high levels of mortgage debt?

    • Mortgage debt is not affected by interest rates in any circumstances, because repayments are fixed for the life of the loan by law
    • Mortgage holders benefit from rising rates because repayments fall in real terms, so their disposable income increases and they spend more
    • Indebted households always increase saving when their interest costs rise, because they want to repay debt quickly from any extra income
    • Higher repayments on variable-rate debt reduce disposable income, so these households cut consumption more sharply

12. Which of the following would most likely raise consumer spending in the short run?

    • a cut in income tax that increases disposable income
    • a fall in house prices that reduces household wealth
    • a rise in unemployment that reduces job security
    • a rise in the rate of VAT on all goods and services

13. A rise in the MPC in an economy, all else equal, is most likely to:

    • reduce the size of the multiplier and the effect on output, because more income is withdrawn each round as households save a larger share
    • leave the multiplier unchanged because consumption is not part of the multiplier calculation
    • increase the MPS by the same amount, since each extra pound of income that is spent must be matched by an equal extra pound of saving
    • increase the size of the multiplier and the effect of any change in spending on output

14. Which is an accurate evaluation of the claim that a fall in savings always reduces economic growth?

    • Savings have no effect on consumption because households spend all their income in every period
    • Savings are irrelevant to growth since all investment is funded by government
    • Lower savings can boost current consumption, but if it reduces funds for investment it may slow growth in the long run
    • Lower savings always raise growth because consumption is the only driver of growth

15. Which statement about the consumption-income relationship is most accurate?

    • Consumption always equals disposable income at every income level, so households never save or borrow and the savings ratio is always zero
    • Consumption falls as disposable income rises in all households
    • Savings are always negative at low incomes and positive at high incomes only
    • At low incomes, households may spend more than their income by borrowing, so consumption can exceed disposable income

16. Which of these is an example of other influences on consumer spending besides income?

    • the rate of change in the exchange rate
    • the rate of government spending on health
    • consumer confidence about future job security
    • the level of export demand from abroad

17. A household saves 1,500 out of disposable income of 25,000 in a year. What is its average propensity to save?

    • 0.06
    • 0.15
    • 0.6
    • 1.67

18. Which group is most likely to have a high marginal propensity to consume?

    • high-income households with large financial wealth and investments
    • low-income households with few savings and little financial wealth
    • pension funds investing retirement contributions for the long term
    • firms retaining profits within the business for future investment

19. Which factor is most likely to lower households' marginal propensity to consume?

    • an increase in precautionary saving caused by rising fears of unemployment
    • a rise in house prices that increases the value of household wealth
    • a permanent rise in real incomes that households expect to continue
    • a fall in the cost of credit that makes borrowing cheaper

20. According to Keynes's absolute income hypothesis, consumption depends mainly on:

    • the price level in the previous year, regardless of income
    • the rate of interest alone, with income having no effect
    • current disposable income
    • the stock of money in circulation in the economy

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