Official Explanation
1. According to the passage, it can be inferred that:
Difficulty Level: Hard
Explanation
In this Inference question, it can be inferred from the passage (in paragraph 2) that short-term decreases in income force people to increase their consumption relative to earnings, as you’re told that consumption does not decrease in the short-run. This, then would mean that the ratio of consumption to earnings goes up, therefore increasing MPC.
Answer: C
2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:
Difficulty Level: Easy
Explanation
In this Specific question, return to the passage looking for a paraphrase of an answer choice. In paragraph three, you’ll find the line “…if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption. This implies that the Keynesian multiplier…” This shows the cause-and-effect of the Keynesian multiplier’s being larger for permanent changes; when income changes are permanent, consumers have more incentive to increase consumption, meaning that they have less incentive to increase due to temporary income increases. This is essentially a paraphrase of answer choice D.
Answer: D
3. The primary purpose of the passage is to:
Difficulty Level: Medium
Explanation
Looking at the flow of this passage, the first paragraph outlines the idea of propensity to consume and MPC; the second paragraph talks about the difference between short- and long-run MPC; and the third talks about permanent income vs. temporary income and how each affects MPC. Therefore, the main point of the passage is to explain MPC and how different types of income affects it.
Choices A, B, and C each appear in the passage, but are details, not main points.
Choice E is incorrect, similarly, because of the word “detail” – the passage is a general overview but not detailed, and the specific points of “higher income and wealth levels” is a small portion of what the passage covers.
Answer: D