In economics, the concept of “propensity to consume” refers to the pro

Question

In economics, the concept of “propensity to consume” refers to the proportion of disposable income – income after taxes and transfers – that individuals spend on consumption. Marginal propensity to consume (MPC) is a related metric that quantifies induced consumption, the idea that as income increases a consumer’s consumption will also increase. MPC is the proportion of that additional income that an individual consumes; for example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

In a standard Keynesian model, the MPC will be less than the average propensity to consume (APC) because in the short-run some (autonomous) consumption does not change with income. Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption. Over the long-run, as wealth and income rise, consumption also rises; the marginal propensity to consume out of long-run income is closer to the average propensity to consume.

Economists often distinguish between the marginal propensity to consume out of permanent income and the marginal propensity to consume out of temporary income, because 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 – the measure of that consumption’s impact on additional consumption in the marketplace – should be larger in response to permanent changes in income than it is in response to temporary changes in income (though the earliest Keynesian analyses ignored these subtleties). However, the distinction between permanent and temporary changes in income is often subtle in practice, and it is often quite difficult to designate a particular change in income as being permanent or temporary. What is more, the marginal propensity to consume should also be affected by factors such as the prevailing interest rate and the general level of consumer surplus that can be derived from purchasing.    1 
 1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases.
B. Most households cannot accurately delineate between permanent and temporary changes in income.
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.

2 
 2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.
B. Consumers are more likely to spend temporary income than permanent income.
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
E. Average propensity to consume is less variant than marginal propensity to consume.

3 
 3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.

RC Butler Competition 2021  -  Participate and Win!   
Passage # 4 Date: 4-Jan-2021
 This question is a part of RC Butler Competition 2021 .  Click here for Details

Sajjad1994 · Accepted Answer

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

BIDJI23 · Answer

1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases.
 I think this is not true. 
B. Most households cannot accurately delineate between permanent and temporary changes in income.
 Mostly it's more the theory than the households mentioned here. Because I a household when my boss raises my salary, I know this is for the long term. 
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
 Nope. It depends on the term. 
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
 Do not get this sentence. 
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.
 MPC is a proportion. How can it be negative? And knowing that in the short term, we continue to get the same habits of consumption, so this sounds good.  Maybe only for me...

1-->E

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

I think the key is here: "because if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption."

A. The distinction between permanent and temporary is often difficult to categorize.
 Not what we expect as a reason for this question. 
B. Consumers are more likely to spend temporary income than permanent income.
 It's the contrary. 
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
 Nothing related to the Key. multipliers. 
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
 Yep. I have found what I was looking for! 
E. Average propensity to consume is less variant than marginal propensity to consume.
 Out of scope.

2-->D

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
 I don't think so. 
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
 Not broad enough 
C. Argue that marginal propensity to consume converges with an average propensity to consume as incomes become substantially higher.
 This is not the intent of the author. 
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
 I think this quite a good explanation. 
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.
 No way.

3-->D

I will be curious to have some answers explained for this text, which is really hard to understand for me. Possible? Thanks

Vie3nrose · Answer

Question 2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.
   INCORRECT    --   This should imply the opposite: if permanent vs temp is hard to categorize, then the respective K multipliers shouldn't have a significant (or consistent) difference

B. Consumers are more likely to spend temporary income than permanent income.
   INCORRECT    --   Passage 3 states that "if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption". This answer choice is saying the opposite (that consumers would be less likely to spend in perm income change)

C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
   INCORRECT    --   This is mentioned in the last sentence, but as an additional counterpoint (along with how perm vs temp is difficult to predict) implying that the KM for permanent income changes may not in reality actualize larger than KM for temp

D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
   CORRECT    --   Paragraph 3 states that "if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption". This answer choice is saying the same thing in different words

E. Average propensity to consume is less variant than marginal propensity to consume.
   INCORRECT    --   APC was mentioned in Paragraph 2 (MPC in the long run is closer to APC), but not as a reason in the 3rd paragraph for KM difference between perm and temp income changes

Question 3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
   INCORRECT    --   This was discussed (and also questioned) in Paragraph 3, but is not the primary purpose of the passage

B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
   INCORRECT    --   APC was discussed in paragraph 2, but not in paragraph 3 where KM was discussed. Don't think this specific logic was explained at all, and definitely not purpose of the passage.

C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.
   INCORRECT    --   This was discussed only in Paragraph 2, and is not the primary purpose of the passage

D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
   CORRECT    --   The first paragraph introduces MPC, the second paragraph talks about ST vs LT behaviour of MPC (including in the income decrease scenario), and the third paragraph talks about the different MPC impact in perm vs temp income change. This answer choice makes sense.

E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.
   INCORRECT    --   This was discussed, but the income decrease scenario was also discussed. This answer also doesn't satisfy the discussion around MPC impact in permanent vs temp income change.

Sumi1010 · Answer

Short note of passage

P1:PC = proportion of disposable income consumed; MPC = proportion of additional disposable income consumed.

P2: Keynesian model : Short term (consumption does not change) MPC < APC, Long term MPC close to APC.

P3: Economist: MPC on permanent > MPC on temporary 
Thus, Keynesian is close to MPC on permanent income.
Factors affecting MPC.

Questions :

1. According to the passage, it can be  inferred  that:

A. When a household’s income increases, its marginal propensity to consume decreases.
 Not true, the MPC increases with increase in income. The pace differs on kinds of income and term. 
B. Most households cannot accurately delineate between permanent and temporary changes in income.
 True . "it is often quite difficult to designate a particular change in income as being permanent or temporary." 
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
 Not true, the MPC decreases or does not change with decrease in income.  
D. Early Keynesian analyses  did not allow  for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
 No, the earliest Keynesian analyses ignored it. 
E. In the short run, it is impossible for a household to have a  negative marginal propensity  to consume
 The passage just talks about increase or decrease of MPC and not about negative MPC.

B

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.
 This is the problem that does not make the economists work very conclusive.  
B. Consumers are more likely to spend temporary income than permanent income.
 No, It's actually opposite. 
C. The prevailing  interest rate  is an important factor that consumers generally consider when deciding to spend temporary income.
 The interest rate is a factor determining MPC but it has nothing to do with the difference in permanent and temporary changes. 
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
 Correct. Can be implied from "if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption."  
E. Average propensity to consume is  less variant  than marginal propensity to consume.
 Can't be inferred.MPC does not change in short run.

D

3. The primary purpose of the passage is to:

A.  Predict  that marginal propensity to consume is higher for permanent income than for temporary income.
 The passage's role is not to predict MPC. 
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
 This is done only in paragraph 2.  
C.  Argue  that marginal propensity to consume  converges  with average propensity to consume  as incomes become substantially higher. 
 The passage just says that APC and MPC come closer in long term.  
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
 Correct. The passage introduces MPC (talks about it in all the 3 para) and it's variance. 
E. Detail the  implication of higher income  and wealth levels on a household’s marginal propensity to consume.
 The passage just talks the impact of permanent and temporary income , short and long term, but not on higher income on MPC.

D

GargieMahajan · Answer

1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases. -  opposite as passage says that MPC increases with increase in income. (Incorrect) 
B. Most households cannot accurately delineate between permanent and temporary changes in income.-  we don't about households, the view of Economists is mentioned (Incorrect) 
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.- i t is said that consumption does change with respect to short term fluctuations in income (Incorrect) 
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.-  cannot say because it is mentioned that earlier keynesian model lacks subtleties of types of income (permanent/ temporary) (Incorrect) 
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.-  yeah true, as there is an autonomus level of consumption always mentioned in 2nd para 1st line  (Correct)

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:
 
   because 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 –
  - refer to this part

A. The distinction between permanent and temporary is often difficult to categorize.-  can be inferred but isn't true.(Incorrect) 
B. Consumers are more likely to spend temporary income than permanent income. -  cannot be inferred -Out of Scope (Incorrect) 
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.-  cannot be inferred beacause it isn't told if consumers consider it or not. ( Incorrect) 
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.-   Correct-  matches with snippet copied above) 
E. Average propensity to consume is less variant than marginal propensity to consume.-  cannot be inferred ( Incorrect)

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income. -  partial scope as only last paragraph talks about it. (Incorrect) 
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.-  partial scope as only second paragraph focuses on it.(Incorrect) 
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher. -  Out of Context as in the second para it is mentioned that they converge in the Long Run. (Incorrect) 
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.  yeah, author defines MPC in Para 1, then MPC in the long and short run (types) in Para 2 and MPC with regards to level( temporary and permanent) in para 3 ( Correct)  
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume. -  talks about the other way round too. Incorrect

RashmikaAnegama · Answer

1 B Most households cannot accurately delineate between permanent and temporary changes in income.
In the last paragraph it clearly mentions that it's often difficult.

2 D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
Lines from the passage which support the above answer
because if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption. 
which implies Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income.

3 D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
Options A,B,C are not briefing the entire passage, but talking about a part of it. E is also not explaining the primary purpose.

So, IMO,
1 B
2 D
3 D are the answers

Pankaj0901 · Answer

IMO Answer: 
1. D
2. D
3. B

Explanation:

1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases.
B. Most households cannot accurately delineate between permanent and temporary changes in income.
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.
 
-> A: It's actually the opposite. WRONG
B: Irrelevant. WRONG
C: It is rather, increase in short-term income leads to almost no change in MPC
D: Correct- as stated in P2: "This implies that the Keynesian multiplier – the measure of that consumption’s impact on additional consumption in the marketplace – should be larger in response to permanent changes in income than it is in response to temporary changes in income (though the earliest Keynesian analyses ignored these subtleties)"
E: "impossible" is too strong- as passage doesn't say anything about the negative MPC.

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.
B. Consumers are more likely to spend temporary income than permanent income.
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
E. Average propensity to consume is less variant than marginal propensity to consume.
 
-> A: Irrelevant and not correct.
B: It's the other way round. WRONG
C: Not an accurate answer
D: CORRECT- as stated in the passage clearly.
E: WRONG.

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.
 
-> A: "predict"- there is no predication as the primary purpose. It's all about the theories & factual elements.
B: Correct- The passage tells about the changes in MPC and APC with income variations.
C: WRONG- THere is no argument stated. And it is not the primary purpose of the passage.
D: WRONG- "different types and levels" of income- not stated.. 
E: WRONG- It is not only about the "higher income"- rather it explains the theories. Hence not an apt option.

Neha2404 · Answer

Imo-C

Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption
According to above lines 
MPC= consumption/income
In short term income is decrease and consumption will be stable 
Means MPC Will be increase

1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases.-incorrect 
B. Most households cannot accurately delineate between permanent and temporary changes in income.-incorrect 
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.- correct 
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.-incorrect 
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.-incorrect

Imo-D

because if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption.

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.- incorrect 
B. Consumers are more likely to spend temporary income than permanent income.-incorrect 
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.-incorrect 
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.-correct 
E. Average propensity to consume is less variant than marginal propensity to consume-incorrect

Imo-D

Main point
Para-1- explain MPC
Para-2-explain Standard keynesian model for short term and long term
Para -3- explain keyanesian multipler and temporary and permanent change in income and its impact on MPC

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.- incorrect - it is mentioned only in 3para 
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.-incorrect - it is mentioned in 3rd para
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.incorrect 
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.-correct 
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.-incorrect

Posted from my mobile device

ikatke · Answer

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

A. The distinction between permanent and temporary is often difficult to categorize.
B. Consumers are more likely to spend temporary income than permanent income.
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
E. Average propensity to consume is less variant than marginal propensity to consume.

Ans-D
As per para 3,  if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption.  Other options are not supported.

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.

Ans. D
1st para explain concept of MP. 2nd and 3rd explain its variance among different types and levels of income along with one model.

rocky620 · Answer

Para1  - Introduction to MPC
 Para2  - MPC vs APC - How income changes affects each of them
 Para3  - Effect of type of income changes on MPC (according to economists) & other factors to consider.

1. According to the passage, it can be inferred that:

A. When a household’s income increases, its marginal propensity to consume decreases....  Depends on the type of change. Eliminate.  
B. Most households cannot accurately delineate between permanent and temporary changes in income....  Yes it can be inferred from the third para "However, the distinction between permanent and temporary changes in income is often subtle in practice, and it is often quite difficult to designate a particular change in income as being permanent or temporary." Keep it.  
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.......  No such mention. Eliminate.  
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume......  They ignored the subtleties (as mentioned in third para). But they did not allow cannot be inferred. Eliminate.  
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume........  Cant be inferred. Eliminate.

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

The reason is mentioned in third para " if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption."

A. The distinction between permanent and temporary is often difficult to categorize......  It is mentioned but not as a reason for the above consideration. Eliminate.  
B. Consumers are more likely to spend temporary income than permanent income.......  No. Its opposite. Eliminate  
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.......  It should be considered. But it is not the main reason. Its a weak choice. Eliminate.  
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.....  Yes consumers have greater incentive to increase their consumption when the change is permanent. Keep It.  
E. Average propensity to consume is less variant than marginal propensity to consume....  Not the reason. Eliminate

3. The primary purpose of the passage is to:

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.......  Its only a summary of third Para. Eliminate.  
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.  Its only a summary of second Para. Eliminate.  
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.....  There is no argument. The passage as a whole is an explanation about an Economy KPI. Eliminate.  
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.....  Yes. First Para introduces MPC, and the second, third paras deal with the variance in MPC wrt changes in income levels. Keep It.  
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.....  .Only for second and third para. Eliminate.
  
 IMO Options B, D, D

Deepakjhamb · Answer

1. According to the passage, it can be inferred that:

answer is  d) Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.

lets reason out and eliminate other options :

A. When a household’s income increases, its marginal propensity to consume decreases:  this is against the facts of the passage : MPC is
 is a related metric that quantifies induced consumption, the idea that as income increases a consumer’s consumption will also increase. so decrease in consumption is against the facts in passage , so ruled out

B. Most households cannot accurately delineate between permanent and temporary changes in income:
 this is recycled language from passage not taking care of precision in the language as passage states that it is often quite difficult to designate a particular change in income as being permanent or temporary , so nowhere it can refer to most households as often means many and also difficult to designate does not qualify it to be cannot accurately delineate ,so ruled out

C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
 : precision in language needs to be taken care here , passage states that Short-term decreases in income do not lead to reductions in consumption, because people reduce savings to stabilize consumption , so nowhere this can be taken as increase in marginal propensity to consume , so ruled out  
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume
:  bang on this is the answer as para 3 in passage states that with regards to permanent and temporary income change larger keynesian multiplier be used ( which was ignored in earliest keynesian analyses )- (passage excerpt) This implies that the Keynesian multiplier – the measure of that consumption’s impact on additional consumption in the marketplace – should be larger in response to permanent changes in income than it is in response to temporary changes in income (though the earliest Keynesian analyses ignored these subtleties) 
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume :  this is extreme and very strong language and cannot be accounted for using the scope and facts in the passage ,so this is ruled out

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because:

answer is d) Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.

A. The distinction between permanent and temporary is often difficult to categorize :   this is true fact but this is not the reason why Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income , so ruled out

B. Consumers are more likely to spend temporary income than permanent income : This is against the facts in the passage and is actually reversal of facts as consumer is more likely to spend permanent income than temporary one , so its ruled out

C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income : this is not the reason why Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income , so ruled out  
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income :  yes this is correct actually this is the comparison language just flipped and is consistent with the passage excerpt -if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption (para 3) 
E. Average propensity to consume is less variant than marginal propensity to consume :  this is true but this is not the reason why Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income , so ruled out

3. The primary purpose of the passage is to:

answer is d)Explain the concept of marginal propensity to consume and its variance among different types and levels of income.

A. Predict that marginal propensity to consume is higher for permanent income than for temporary income :  this is limited in scope and is just mentioned in para 3 and thus cannot be the primary purpose alone . 
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume:
 This is just mentioned in para 2 and is too limited in scope and thus cannot be the primary purpose alone  
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher :
 this is just mentioned in para 2 and is too limited in scope and thus cannot be the primary purpose alone . 
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income :

bang on this is what author does , in first para author explains MPC , then in second para discusses its variance based on levels of income and in third para he discusses MPC's variance in case of different types of incomes - permanent and temporary , thus it covers full scope of the passage and is the ideal answer for primary purpose  
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume: t his is just part of para 2 is too limited in scope and thus cannot be the primary purpose alone

Tahamohsin · Answer

1. According to the passage, it can be inferred that: 
 C 
A. When a household’s income increases, its marginal propensity to consume decreases.
 It states opposite 
B. Most households cannot accurately delineate between permanent and temporary changes in income.
 The passage stated that delineating between permanent and temporary changes in income is difficult, but it did not state that it is done by the household. 
C. Decreases in income generally lead to short-run increases in marginal propensity to consume.
 Honest only this one left; I was able to eliminate all other 
D. Early Keynesian analyses did not allow for a Keynesian multiplier for income changes with regard to marginal propensity to consume.
 The passage actually stated that Keynesian analyses ignored subtleties between permanent changes and temporary changes. 
E. In the short run, it is impossible for a household to have a negative marginal propensity to consume.
 Impossible- make this choice extreme

2. According to the passage, Keynesian multipliers should be larger for permanent changes in income than for temporary changes in income because: 
 D 
 The passage stated if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption. 
A. The distinction between permanent and temporary is often difficult to categorize.
 Not the answer. 
B. Consumers are more likely to spend temporary income than permanent income.
 No such comparison was made in the passage 
C. The prevailing interest rate is an important factor that consumers generally consider when deciding to spend temporary income.
 Talking about the wrong detail. 
D. Consumers have less incentive to increase their consumption due to temporary income than due to permanent income.
 Correct, if consumers expect a change in income to be permanent, then they have a greater incentive to increase their consumption  
E. Average propensity to consume is less variant than marginal propensity to consume.
 Out of scope.

3. The primary purpose of the passage is to: 
 D 
A. Predict that marginal propensity to consume is higher for permanent income than for temporary income.
 Only the first and second para talk about this, not the whole passage.  
B. Explain how the standard Keynesian model differentiates between marginal propensity to consume and average propensity to consume.
 Detail from third para,  
C. Argue that marginal propensity to consume converges with average propensity to consume as incomes become substantially higher.
 Detail from the second para 
D. Explain the concept of marginal propensity to consume and its variance among different types and levels of income.
 Correct; this choice covers the whole passage 
E. Detail the implication of higher income and wealth levels on a household’s marginal propensity to consume.
 Wrong

Sajjad1994 · Answer

So here the first question is hard a 700 level I can say, second question is easy and the last question is medium. If you missed the 1st question this is not a big deal as you don’t have to answer all 700 level questions correctly to get a good GMAT score. Majority have missed the first question so I will post the OE. Only  Neha2404  got that right and is on top here with 8.5/10. Apart from question #1, Good explanation by  Sumi1010   Vie3nrose   Deepakjhamb   GargieMahajan  and  rocky620

Pankaj0901  You tried well but missing the last question is not good for your GMAT RC prep as this was not a hard question.  ikatke  You didn’t provide explanation of question #1, I know the question was hard and you might missed that but no one is perfect here including myself, whenever you have doubt on your reasoning don’t hesitate to post. We all are students. Points table will be updated soon.

Edit:   Tahamohsin  you are a bit late but i will consider you explanation, please post your explanation before 8 am Pacific time. Well done for getting all correct.

Good Luck for today's questions.

Tahamohsin · Answer

Sajjad1994 
Sorry, it won't happen again.

RahulHGGmat · Answer

Hi Expert,

Hope you are doing well.

I am confused between options B and C for question number 1. I opted for B and was wrong.

Sajjad1994  has already provided an explanation why C is correct and I indeed agree with him. However, I am unable to understand why B is incorrect. Hence, I would request you to affirm me the reason for the same.

Many Thanks in advance.

bM22 · Answer

Hi  RahulHGGmat ,

What's mentioned in the passage : "However, the distinction between permanent and temporary changes in income is often subtle in practice, and it is often quite difficult to designate a particular change in income as being permanent or temporary.", but we still cannot infer if households find it difficult to designate a particular change in income as being permanent or temporary. Thus B is incorrect.

Hope This Helps.
Thanks.

mahakbansal8786 · Answer

In question no 1, option c. Shouldn't it be average propensity to consume instead of marginal propensity to consume? Because marginal propensity is calculated on additional increase in income but in the case of decrease in income marginal propensity to consume can't be calculated because there is not any increase

VerbalBot · Answer

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