ECS3703 Assignment 2 (Macroeconomics)
EXAM STUDY GUIDE 2025/2026 QUESTIONS
& VERIFIED ANSWERS || 100% SUCCESS
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ECS3703 Macroeconomics Assignment 2: Exam Study Guide
Instructions: Choose the single best answer for each question.
1. In the circular flow of income model, a situation where injections are greater than leakages
will most likely lead to:
a) A decrease in the equilibrium level of national income.
b) An increase in the equilibrium level of national income.
c) No change in the equilibrium level of national income.
d) An increase in the inflation rate only.
Answer: b) An increase in the equilibrium level of national income.
Rationale: Injections (I, G, X) add to the circular flow, while leakages (S, T, M) withdraw from it. If
injections exceed leakages, total spending in the economy increases, leading to a multiplied
expansion of national income.
2. The marginal propensity to consume (MPC) is defined as:
a) Total consumption divided by total income.
b) The change in consumption divided by the change in disposable income.
c) The change in saving divided by the change in disposable income.
d) 1 divided by the marginal propensity to save (MPS).
Answer: b) The change in consumption divided by the change in disposable income.
Rationale: By definition, MPC = ΔC / ΔYd. It measures the fraction of an additional rand of
disposable income that is spent on consumption.
3. If the MPC is 0.8 and autonomous investment increases by R100 million, the total increase
in national income will be:
a) R80 million
b) R100 million
c) R500 million
d) R125 million
Answer: c) R500 million
*Rationale: The multiplier (k) is 1 / (1 - MPC) = 1 / (1 - 0.8) = 5. Therefore, ΔY = k * ΔI = 5 *
R100m = R500m.*
, 4. The 'paradox of thrift' suggests that:
a) Higher savings are always beneficial for economic growth.
b) An attempt by the economy as a whole to increase savings may lead to a fall in aggregate
output and income.
c) Investment is determined by the level of savings.
d) Thrift is a virtue that all individuals should practice.
Answer: b) An attempt by the economy as a whole to increase savings may lead to a fall in
aggregate output and income.
Rationale: In the Keynesian model, if everyone tries to save more (increase leakage), aggregate
demand falls. This leads to reduced production, lower incomes, and ultimately, no net increase in
savings.
5. In the Keynesian cross model, the equilibrium level of income is determined where:
a) Aggregate Demand equals Aggregate Supply.
b) Planned investment equals actual investment.
c) Planned aggregate expenditure equals actual national output.
d) The consumption function intersects the 45-degree line.
Answer: c) Planned aggregate expenditure equals actual national output.
Rationale: Equilibrium occurs where the total spending planned by all agents in the economy (C
+ I + G) is exactly equal to the value of goods and services produced (Y).
6. Which of the following is considered an injection into the circular flow of income?
a) Savings
b) Taxes
c) Imports
d) Government Spending
Answer: d) Government Spending
Rationale: Injections are spending that originates outside the domestic household sector.
Government spending (G) is an injection, while savings (S), taxes (T), and imports (M) are
leakages.
7. The money multiplier process assumes that:
a) Banks hold all deposits as reserves.
b) The central bank has no control over the money supply.
c) There is no cash leakage from the banking system.
d) Banks lend out all their excess reserves.
Answer: d) Banks lend out all their excess reserves.
*Rationale: The simple money multiplier formula (1/rr) assumes that banks loan out every rand
of excess reserves they have and that the public holds no cash (no cash leakage).*
EXAM STUDY GUIDE 2025/2026 QUESTIONS
& VERIFIED ANSWERS || 100% SUCCESS
RATE <NEW VERSION>
ECS3703 Macroeconomics Assignment 2: Exam Study Guide
Instructions: Choose the single best answer for each question.
1. In the circular flow of income model, a situation where injections are greater than leakages
will most likely lead to:
a) A decrease in the equilibrium level of national income.
b) An increase in the equilibrium level of national income.
c) No change in the equilibrium level of national income.
d) An increase in the inflation rate only.
Answer: b) An increase in the equilibrium level of national income.
Rationale: Injections (I, G, X) add to the circular flow, while leakages (S, T, M) withdraw from it. If
injections exceed leakages, total spending in the economy increases, leading to a multiplied
expansion of national income.
2. The marginal propensity to consume (MPC) is defined as:
a) Total consumption divided by total income.
b) The change in consumption divided by the change in disposable income.
c) The change in saving divided by the change in disposable income.
d) 1 divided by the marginal propensity to save (MPS).
Answer: b) The change in consumption divided by the change in disposable income.
Rationale: By definition, MPC = ΔC / ΔYd. It measures the fraction of an additional rand of
disposable income that is spent on consumption.
3. If the MPC is 0.8 and autonomous investment increases by R100 million, the total increase
in national income will be:
a) R80 million
b) R100 million
c) R500 million
d) R125 million
Answer: c) R500 million
*Rationale: The multiplier (k) is 1 / (1 - MPC) = 1 / (1 - 0.8) = 5. Therefore, ΔY = k * ΔI = 5 *
R100m = R500m.*
, 4. The 'paradox of thrift' suggests that:
a) Higher savings are always beneficial for economic growth.
b) An attempt by the economy as a whole to increase savings may lead to a fall in aggregate
output and income.
c) Investment is determined by the level of savings.
d) Thrift is a virtue that all individuals should practice.
Answer: b) An attempt by the economy as a whole to increase savings may lead to a fall in
aggregate output and income.
Rationale: In the Keynesian model, if everyone tries to save more (increase leakage), aggregate
demand falls. This leads to reduced production, lower incomes, and ultimately, no net increase in
savings.
5. In the Keynesian cross model, the equilibrium level of income is determined where:
a) Aggregate Demand equals Aggregate Supply.
b) Planned investment equals actual investment.
c) Planned aggregate expenditure equals actual national output.
d) The consumption function intersects the 45-degree line.
Answer: c) Planned aggregate expenditure equals actual national output.
Rationale: Equilibrium occurs where the total spending planned by all agents in the economy (C
+ I + G) is exactly equal to the value of goods and services produced (Y).
6. Which of the following is considered an injection into the circular flow of income?
a) Savings
b) Taxes
c) Imports
d) Government Spending
Answer: d) Government Spending
Rationale: Injections are spending that originates outside the domestic household sector.
Government spending (G) is an injection, while savings (S), taxes (T), and imports (M) are
leakages.
7. The money multiplier process assumes that:
a) Banks hold all deposits as reserves.
b) The central bank has no control over the money supply.
c) There is no cash leakage from the banking system.
d) Banks lend out all their excess reserves.
Answer: d) Banks lend out all their excess reserves.
*Rationale: The simple money multiplier formula (1/rr) assumes that banks loan out every rand
of excess reserves they have and that the public holds no cash (no cash leakage).*
