Dear Student
In this tutorial letter, we provide you with the answers to the multiple-choice questions in
Assignment 03, with brief explanations where necessary. In most cases, however, we merely refer
you to the prescribed textbook and/or the study guide. If you have any questions about the
answers that are provided, please discuss this with your fellow students and your e-tutor on the e-
tutor website.
1 DISCUSSION OF ASSIGNMENT 03/2018
All references, unless otherwise indicated, are to the prescribed textbook: Mohr, P and associates
2015. Economics for South African students, fifth edition. Van Schaik (Pretoria)
3.1 Only option [3] is correct. Refer to page 316.
Option [1] and [2] are incorrect. Production creates income; hence they are always equal.
However, there is no guarantee that all income earned will be spent. Aggregate expenditure
(i.e. total spending) may be equal to, less or greater than, total production.
3.2 Only statement [2] is correct. According to Say’s law, excess production is not possible
because there is always enough demand for goods and services in the economy. Option
[1], [3] and [4] are incorrect. Say’s law indicates that supply creates its own demand. Refer
to section 17.1.
3.3 The correct statement is [4]. A simple Keynesian model explains the workings of a closed
economy with only households and firms. Refer to the basic assumptions of the model on
page 316.
3.4 The correct statement is [4]. In the simple Keynesian model, it is assumed that households
can either spend or save their income. That is, household income equals to consumption
plus saving. Consumption (spending on consumer goods and services) is financed by
household income or saving. If total consumption exceeds total income, this means that
other part of consumption was financed by savings which is an indication of dissaving.
Option [1] is incorrect. A change in autonomous consumption will have an impact on
consumer spending, ceteris paribus.
Option [2] is incorrect. There is a negative relationship between consumption and saving.
Option [3] is incorrect. Total consumption is equal to autonomous consumption when
income is zero.
The following information was given to answer questions 3.5 and 3.6. It is assumed
that consumption spending is C=Ć+ cY where Ć = 500; c=¿ 3/4; equilibrium income
is Y =1000.
Induced consumption (cY ) = 0.75* R 1000 = R750
Total consumption (C ) = 500 + 750 = R 1250
Marginal propensity to consume (c ) is 3/4 (0.75)
Marginal propensity to save ( s ) = 1 - c = 1 - 0.75 = 0.25
Total saving ( sY ) = 0.25* R 1000 = R 250
3.5 Based on the calculations above. Only option [3] is correct.
3.6 The correct option is [2]. A decrease of marginal propensity to consume from 0.75 to 0.5 will
result in a decrease in both multiplier and the equilibrium level of income.
, 3.7 The correct option is [3]. In contrast to consumption, investment spending is not primarily a
function of income. Thus, investment does not respond in a systematic way to changes in
income. This means that if the level of income decreases, investment spending will remain
unchanged.
The following information about the South African economy was given. We use it to answer
questions 3.8, 3.9 and 3.10.
Income Consumption expenditure Saving
(billions of rands) (billions of rands) (billions of rands)
0 260 -260
300 340 -40
400 420 20
500 500 0
600 580 20
700 660 40
3.8 Option [4] is correct.
∆ C 500−420
Marginal propensity to consume (MPC) = = =0.8
∆ Y 500−400
Refer to page 319.
3.9 Only option [4] is correct. The value of saving at:
- Income level 500 is 0 (500 - 500)
- Income level 700 is 40 (700 - 660)
3.10 The correct option is [1]. Consumption expenditure is equal to autonomous consumption
when income level is 0. Therefore, autonomous consumption is 260.
3.11 This question had an error and students was therefore credited for the question.
3.12 This question had an error and students was therefore credited for the question.
3.13 The correct statement is [4]. Under the Keynesian model, marginal propensity to save
(MPS) determines the amount of income to be saved. In addition, MPS + MPC = 1. An
increase in the marginal propensity to save will lead to a decrease in the marginal
propensity to consume, and an increase in saving. This will result in a decrease in
consumption spending and the equilibrium level of income.
Option [1] is incorrect. A decrease in interest rate will stimulate investment spending which
will lead to an increase in the aggregate spending and the equilibrium level of income.
Option [2] is incorrect. There is no negative relationship between consumption spending
and investment spending. Option [3] is incorrect. An increase in the tax rate will lead to a
In this tutorial letter, we provide you with the answers to the multiple-choice questions in
Assignment 03, with brief explanations where necessary. In most cases, however, we merely refer
you to the prescribed textbook and/or the study guide. If you have any questions about the
answers that are provided, please discuss this with your fellow students and your e-tutor on the e-
tutor website.
1 DISCUSSION OF ASSIGNMENT 03/2018
All references, unless otherwise indicated, are to the prescribed textbook: Mohr, P and associates
2015. Economics for South African students, fifth edition. Van Schaik (Pretoria)
3.1 Only option [3] is correct. Refer to page 316.
Option [1] and [2] are incorrect. Production creates income; hence they are always equal.
However, there is no guarantee that all income earned will be spent. Aggregate expenditure
(i.e. total spending) may be equal to, less or greater than, total production.
3.2 Only statement [2] is correct. According to Say’s law, excess production is not possible
because there is always enough demand for goods and services in the economy. Option
[1], [3] and [4] are incorrect. Say’s law indicates that supply creates its own demand. Refer
to section 17.1.
3.3 The correct statement is [4]. A simple Keynesian model explains the workings of a closed
economy with only households and firms. Refer to the basic assumptions of the model on
page 316.
3.4 The correct statement is [4]. In the simple Keynesian model, it is assumed that households
can either spend or save their income. That is, household income equals to consumption
plus saving. Consumption (spending on consumer goods and services) is financed by
household income or saving. If total consumption exceeds total income, this means that
other part of consumption was financed by savings which is an indication of dissaving.
Option [1] is incorrect. A change in autonomous consumption will have an impact on
consumer spending, ceteris paribus.
Option [2] is incorrect. There is a negative relationship between consumption and saving.
Option [3] is incorrect. Total consumption is equal to autonomous consumption when
income is zero.
The following information was given to answer questions 3.5 and 3.6. It is assumed
that consumption spending is C=Ć+ cY where Ć = 500; c=¿ 3/4; equilibrium income
is Y =1000.
Induced consumption (cY ) = 0.75* R 1000 = R750
Total consumption (C ) = 500 + 750 = R 1250
Marginal propensity to consume (c ) is 3/4 (0.75)
Marginal propensity to save ( s ) = 1 - c = 1 - 0.75 = 0.25
Total saving ( sY ) = 0.25* R 1000 = R 250
3.5 Based on the calculations above. Only option [3] is correct.
3.6 The correct option is [2]. A decrease of marginal propensity to consume from 0.75 to 0.5 will
result in a decrease in both multiplier and the equilibrium level of income.
, 3.7 The correct option is [3]. In contrast to consumption, investment spending is not primarily a
function of income. Thus, investment does not respond in a systematic way to changes in
income. This means that if the level of income decreases, investment spending will remain
unchanged.
The following information about the South African economy was given. We use it to answer
questions 3.8, 3.9 and 3.10.
Income Consumption expenditure Saving
(billions of rands) (billions of rands) (billions of rands)
0 260 -260
300 340 -40
400 420 20
500 500 0
600 580 20
700 660 40
3.8 Option [4] is correct.
∆ C 500−420
Marginal propensity to consume (MPC) = = =0.8
∆ Y 500−400
Refer to page 319.
3.9 Only option [4] is correct. The value of saving at:
- Income level 500 is 0 (500 - 500)
- Income level 700 is 40 (700 - 660)
3.10 The correct option is [1]. Consumption expenditure is equal to autonomous consumption
when income level is 0. Therefore, autonomous consumption is 260.
3.11 This question had an error and students was therefore credited for the question.
3.12 This question had an error and students was therefore credited for the question.
3.13 The correct statement is [4]. Under the Keynesian model, marginal propensity to save
(MPS) determines the amount of income to be saved. In addition, MPS + MPC = 1. An
increase in the marginal propensity to save will lead to a decrease in the marginal
propensity to consume, and an increase in saving. This will result in a decrease in
consumption spending and the equilibrium level of income.
Option [1] is incorrect. A decrease in interest rate will stimulate investment spending which
will lead to an increase in the aggregate spending and the equilibrium level of income.
Option [2] is incorrect. There is no negative relationship between consumption spending
and investment spending. Option [3] is incorrect. An increase in the tax rate will lead to a
