Unit notes and practice questions

Grade 11 Economics unit 4: Consumption, saving and investment

Everything here is for unit 4 of the Grade 11 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

5
Cards: 10
Practice questions on unit 4: 91–114
The textbook pages for unit 4

What unit 4 covers

1.Consumption
2.Average Propensity to Consume (APC)
3.Marginal Propensity to Consume (MPC)
4.Determinants of Consumption Expenditure
5.Saving
6.Average Propensity to Save (APS)
7.Marginal Propensity to Save
8.Determinants of Saving
9.The Relationship between Saving and Consumption
10.Investment
11.Investment Types
12.Determinants of Investment
13.Role of Investment in Economic Growth

Short notes for unit 4

The cards filed under this chapter on the Grade 11 Economics page. Open one at a time.

Consumption FunctionFormula

C = C_0 + c Y_d

C = C_0 + c Y_d

$C$: Total Consumption expenditure $\text{ETB}$
$C_0$: Autonomous Consumption $\text{ETB}$
$c$: Marginal Propensity to Consume $1$
$Y_d$: Disposable Income $\text{ETB}$

When you use it

Use this formula to calculate total household consumption expenditure from autonomous consumption and disposable income.

Watch out

Autonomous consumption is strictly greater than zero even when disposable income is zero.

Drafted from Grade 11 Economics, pages 91-114, then checked twice before it went up

Net InvestmentFormula

\text{Net Investment} = \text{Gross Investment} - \text{Depreciation}

\text{Net Investment} = \text{Gross Investment} - \text{Depreciation}

$\text{Net Investment}$: Net Investment $\text{ETB}$
$\text{Gross Investment}$: Gross Investment $\text{ETB}$
$\text{Depreciation}$: Capital Depreciation $\text{ETB}$

When you use it

Use this formula to find the actual addition to the productive capital stock of an economy.

Watch out

Spending that only replaces worn-out capital is replacement investment and does not add to net productive capacity.

Drafted from Grade 11 Economics, pages 91-114, then checked twice before it went up

Propensities to Consume and SaveReference tableAverage · Marginal

Measure	Consumption	Saving	Identity
Average	$\text{APC} = \frac{C}{Y_d}$	$\text{APS} = \frac{S}{Y_d}$	$\text{APC} + \text{APS} = 1$
Marginal	$\text{MPC} = \frac{\Delta C}{\Delta Y_d}$	$\text{MPS} = \frac{\Delta S}{\Delta Y_d}$	$\text{MPC} + \text{MPS} = 1$

When you use it

Use these ratios to relate total or changing income to consumption and saving shares.

Watch out

APC and APS sum to 1, while MPC and MPS sum to 1. Never add an average propensity to a marginal propensity.

Drafted from Grade 11 Economics, pages 91-114, then checked twice before it went up

Real Interest RateFormula

r = i - \pi

r = i - \pi

$r$: Real Interest Rate $\%$
$i$: Nominal Interest Rate $\%$
$\pi$: Inflation Rate $\%$

When you use it

Use this formula to calculate the real cost of borrowing or true return on saving adjusted for inflation.

Watch out

Nominal interest rate is unadjusted for inflation, while real interest rate subtracts inflation.

Drafted from Grade 11 Economics, pages 91-114, then checked twice before it went up

Saving FunctionFormula

S = -C_0 + (1 - c)Y_d

S = -C_0 + (1 - c)Y_d

$S$: Saving $\text{ETB}$
$-C_0$: Dissaving at zero income $\text{ETB}$
$1 - c$: Marginal Propensity to Save $1$
$Y_d$: Disposable Income $\text{ETB}$

When you use it

Use this formula to determine total household saving at any given level of disposable income.

Watch out

The vertical intercept is negative, showing dissaving when income is zero.

Drafted from Grade 11 Economics, pages 91-114, then checked twice before it went up

Practice questions on unit 4

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

If a worker in Addis Ababa earns a gross income of 12,000 birr and pays 2,000 birr in personal income taxes, what is their disposable income (Y_d)?

A.10,000 birr
B.14,000 birr
C.6,000 birr
D.24,000 birr

Show the answer and why

Answer: A 10,000 birr

Why

Disposable income is calculated as gross income minus personal taxes: Y_d = Y - T = 12,000 birr - 2,000 birr = 10,000 birr.

Question 2

What term describes the minimum consumption spending that a household needs to survive even when disposable income is zero?

A.Autonomous consumption
B.Induced consumption
C.Public investment
D.Marginal saving

Show the answer and why

Answer: A Autonomous consumption

Why

Autonomous consumption (C₀) is independent of disposable income. It is the positive amount of spending required to survive when income is zero, financed through borrowing or past savings.

Question 3

In macroeconomic theory, what is the sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS)?

A.1
B.0
C.100
D.0.5

Show the answer and why

Answer: A 1

Why

Since any additional disposable income is either spent or saved, the change in consumption plus the change in saving equals the change in income, meaning MPC + MPS = 1.

Question 4

A bank in Hawassa offers a nominal interest rate of 14 percent per year. If the inflation rate is 6 percent, what is the real interest rate?

A.8 percent
B.20 percent
C.2.33 percent
D.84 percent

Show the answer and why

Answer: A 8 percent

Why

The real interest rate equals the nominal interest rate minus the inflation rate: 14% - 6% = 8%.

Question 5

A household in Gondar earns a disposable income of 5,000 birr and spends 3,500 birr on consumption. What is the average propensity to consume (APC)?

A.0.70
B.0.30
C.1.43
D.0.50

Show the answer and why

Answer: A 0.70

Why

Average propensity to consume is total consumption divided by disposable income: APC = C / Y_d = 3,500 / 5,000 = 0.70 (or 70%).

Question 6

A consumer's disposable income increases from 4,000 birr to 6,000 birr, and their consumption increases from 3,200 birr to 4,600 birr. What is their marginal propensity to consume (MPC)?

A.0.70
B.0.30
C.0.77
D.1.40

Show the answer and why

Answer: A 0.70

Why

MPC is the change in consumption divided by the change in disposable income: (4,600 - 3,200) / (6,000 - 4,000) = 1,400 / 2,000 = 0.70.

Question 7

According to the textbook, how do economists distinguish between saving and savings?

A.Saving is a flow concept, while savings is a stock concept.
B.Saving is a stock concept, while savings is a flow concept.
C.Saving refers to taxes, while savings refers to bank deposits.
D.Saving is done by the government, while savings is done by consumers.

Show the answer and why

Answer: A Saving is a flow concept, while savings is a stock concept.

Why

Saving refers to the ongoing act of depositing or setting aside money (a flow concept), while savings refers to the accumulated money already saved (a stock concept).

Question 8

A manufacturing company in Bahir Dar makes a gross capital investment of 850,000 birr. If the capital depreciation during the year is 150,000 birr, what is the net investment?

A.700,000 birr
B.1,000,000 birr
C.150,000 birr
D.550,000 birr

Show the answer and why

Answer: A 700,000 birr

Why

Net investment = Gross investment - Depreciation = 850,000 birr - 150,000 birr = 700,000 birr.

Question 9

Assume a family's consumption function is given by C = 120 + 0.8Y_d. If the family's disposable income is 1,500 birr, what are the induced consumption and the total consumption?