Determination Of Income And Employment - Class 12 Commerce Economics - Extra Questions

Define marginal propensity to consume. 

Marginal Propensity to Consume expresses the propensity to consume in proportionate terms. It refers to the ratio of change in the consumption expenditure and change in the disposable income. Algebraically, 
$$MPC = c = \dfrac{\Delta C}{\Delta Y_d}$$


An economy is in equilibrium. From the following data. calculate the marginal propensity to save : 
(a) Income $$= 10,000$$ 
(b) Autonomous consumption $$= 500$$ 
(c) Consumption expenditure $$= 8,000$$

Given 
Income $$= 10,000$$
Autonomous consumption $$ (\overline{C})= 500$$
Consumption expenditure $$(C)= 8,000$$
we know,
$$C=\overline{C}=CY$$
So, $$8000=500+c (10,000)$$
hence $$C = 0.75$$
Now we know that $$MPS = 1 - MPC$$
or $$s=1-C$$
$$s=1-0.75$$
$$s=0.25$$
hence, the marginal propensity to consume to save is $$0.25$$.


Define ex post measure.

Ex-post is calculated using the beginning and ending asset values for a specific period, any growth or decline in the asset value plus any earned income produced by the asset during the period. Analysts use ex-post data on investment price fluctuations, earnings and other metrics to predict expected returns The term ex-ante is a phrase meaning "before the event". Ex-ante or notional demand refers to the desire for goods and services which is not backed by the ability to pay for those goods and services. This is also termed as ‘wants of people’.  is used most commonly in the commercial world, where results of a particular action, or series of actions, are forecast in advance (or intended). Buying a lottery ticket loses you money ex ante but if you win, it was the right decision ex post



Explain government expenditure.

Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer.


What is aggregate supply?

Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period.


Distinguish between Autonomous Consumption and Induced Consumption.

  • Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy. 
  • Induced consumption refers to that consumption which occurs on the basis of change in income. It changes when there is some same change in the level of income in the economy. 


What is effective demand? How is it determined?

Effective demand refers to the willingness and ability of consumers to purchase goods at different prices. It shows the amount of goods that consumers are actually buying – supported by their ability to pay.

In Keynes’s macroeconomic theory, effective demand is the point of equilibrium where aggregate demand = aggregate supply. The importance of Keynes’ view is that effective demand may be insufficient to achieve full employment due to unemployment and workers without income to produce unsold goods.

The two determinants of effective demand are consumption and investment expenditures. When income increases consumption expenditure also increases but by less than the increase in income. Thus there arises a gap between income and consumption which leads to decline in the volume of employment.



Define or explain the following concepts.
Dis-savings.

Dis-savings refer to the negative savings i.e. using the past savings or expenses met by borrowing. Dis-savings are done when the consumption expenditure is greater than the income $$(C > Y)$$. This consumption is called autonomous consumption which is income inelastic. To meet the consumption expenditure, the past savings are used. This is called dis-savings when people may borrow money to meet the consumption expenditure.
The diagram shows the dis-savings, which is to the left of the Break even point. Also when there is dis-saving, the saving function curve will be in the negative quadrant.
1278618_775515_ans_63b318878e714eba9015c34bdee7db51.png


Answer the following questions.
What are the efforts of population on consumption expenditure?

(1) Consumption expenditure refers to the total amount spent by the consumers on the purchase of goods and services to satisfy their wants.
(2) It is one of the determinants of aggregate demand.
(3) Consuming expenditure is determined by many factors like disposable income, fashion, future expectations, credit facility, stocks of wealth and size and composition of population.  
(4) There is direct relationship between the size of population and the consumption expenditure.
(5) If the country has large population then consumption expenditure will be high and vice-versa. This will raise the demand, therefore production and employment will increase.
(6) With increase in employment, income also increases. It increases the purchasing power of people.
(7) With increase in population the government consumption expenditure on education, health, defence, police, etc. increases.


Answer in detail.
Explain Keynes subjective and objective factors influencing consumption function.

The subjective factors that determine the consumption function are usually psychological factors only: 

1. Demonstration Motive: If consumers are influenced by the consumption of other people and try to adopt similar consumption practices, such practices are known as demonstration effect. If the people of a country are affected by the demonstration effect, then the propensity to consume will be high and if not affected by the demonstration effect, then the propensity to consume will be low.


2. Security Motive: The families and individuals in the modern industrialized societies are highly conscious with old age and other unforeseen contingencies related to economic insecurity. Hence, people try to save regularly a part of their income. Such savings reduce the consumption function.


3. Improvement and Development Motive: Improvement and development motives of the country and individuals also influence the pattern of consumption function. If the people would like to develop and improve their life and society, then they are ready to sacrifice a part of their present consumption. Therefore, they will save for future to enhance their quality of life and vice-versa. 


The objective factors that influence consumption function are: 

 

1. Real income: When real income of the community increases, consumption expenditure also increases but by a smaller amount. 



2. Expectation change in price: If  prices are expected to be high in future, the propensity to consume increases or the consumption function shifts upward.



3. Changes in fiscal: If taxes directly affect the poor people and reduce their income, then the propensity to consume is high and if rich persons are not taxed at a progressive rate and they accumulate more wealth, then the propensity to consume is low. 



4. Distribution of income and wealth: People with low income group have high propensity to consume and rich people will have low propensity to consume. An equal distribution of wealth raises the propensity to consume.


5. Change in the rate of interest: When the interest rate is raised, it generally induces people to decrease expenditure and save more for lending purposes. On the other hand, when the interest rate is reduced, it usually encourages expenditure as savings becomes less attractive due to decreased rate. So an increase in the rate of interest generally reduces propensity to consume or shifts the consumption function downward and a fall in the rate of interest usually helps to the increase of propensity to consume or shifts the consumption function upward. 

 

 



Answer in detail.
Explain in detail 'saving function with schedule and diagram.

Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value. 

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

                                                                                                                              

For example, s= -50 and MPS= 0.5. Then, savings function schedule will be as follows: 

Income (Y)

Savings = s+ (1-b) Y

0

-50

100

0

200

50


 


1270254_775783_ans_e2b4736c12294c41b479dd00695e7e54.png


Answer in detail.
What are the objective factors influencing consumption function.

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

The objective factors that influence consumption function are: 


1. Real income: When real income of the community increases, consumption expenditure also increases but by a smaller amount. 

2. Expectation change in price: If  prices are expected to be high in future, the propensity to consume increases or the consumption function shifts upward.

3. Changes in fiscal: If taxes directly affect the poor people and reduce their income, then the propensity to consume is high and if rich persons are not taxed at a progressive rate and they accumulate more wealth, then the propensity to consume is low. 

4. Distribution of income and wealth: People with low income group have high propensity to consume and rich people will have low propensity to consume. An equal distribution of wealth raises the propensity to consume.

5. Change in the rate of interest: When the interest rate is raised, it generally induces people to decrease expenditure and save more for lending purposes. On the other hand, when the interest rate is reduced, it usually encourages expenditure as savings becomes less attractive due to decreased rate. So an increase in the rate of interest generally reduces propensity to consume or shifts the consumption function downward and a fall in the rate of interest usually helps to the increase of propensity to consume or shifts the consumption function upward. 




The value of marginal propensity to consume is $$0.6$$ and initial income in the economy is Rs. $$100$$ crores. Prepare a schedule showing Income, Consumption and Saving. Also show the equilibrium level of income by assuming autonomous investment of Rs. $$80$$ crores.

Income = Rs.100 crore
MPC = 0.6
Consumption = Income $$\times$$ MPC = 100 cr $$\times$$ 0.6 = 60 crore
Savings = Income - Saving = 100 crore - 60 crore = 40 crore
Equilibrium level of income (Y) = C+I = 60 cr + 80 cr = 140 cr


What is meant by aggregate demand? State its components.

Aggregate demand refers to the total demand of goods and services in an economy. Components of aggregate demand are-
1) Private consumption expenditure (out of disposable income after paying tax)
2) Private investment expenditure
3) Government expenditure
4) Net exports



Why does the consumption curve not start from the origin?

The consumption curve does not start from the origin because at zero level of income, the consumption is not zero. There is certain minimum consumption in order to survive, i.e. autonomous consumption.


A consumer consumes goods $$X$$ and $$Y$$. Given below is his marginal utility schedule for goods $$X$$ and $$Y$$. Suppose, the price of $$X$$ is $$Rs.2$$, $$Y$$ is $$Rs.1$$ and income $$Rs.12$$. State the law of Equimarginal utility and explain how the consumer will attain equilibrium.
Units123456
$$MU_X$$1614121086
$$MU_Y$$11109876

The law of equi-marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal. 
The equilibrium condition is satisfied when the consumer consumes the goods in the combination of 1 unit of Good X and 4 units of Good Y. At this level of consumption, the total expenditure of the consumer is :(1 × ` 2) + (4 × ` 1) = 2 + 4 = 6This is attainable also in his given income of Rs 12.


Explain how a firm in perfect competition incurs loss, in short-run equilibrium.

The situation occurs when the price is so low that it does not cover fully the AFC. The market price is less than AC of production and the firm incurs losses. This situation is graphically illustrated. At price OP determined by the intersection of market demand and supply comes equilibrium is at point E. At point E, MC = MR and MC curve cuts MR from below. Losses are incurred. Losses are calculated as:
AR = MR = P
TR < TC
TR = PEQO
TC = RCQO
LOSS = RCEP
AR = P covers AVC. The firm is not able to completely cover the AFC. The firm still continues to produce even though there are losses because at least the AVC is being covered by the price.


Answer briefly each of the following questions.
What is meant by ex-ante demand and ex-post demand?

Ex-ante demand refers to the desired demand or planned demand during the period of one year. This is the market demand which is intended to be expected in the economy during the period of one year by the consumers. 

Ex-post demand refers to the actual demand in the economy during the period of one year. This aspect of demand is considered in the estimation of equilibrium price and output in the economy.



Explain how a producer attains equilibrium using the TR and TC approach.

According to the TR and TC approach, producer's equilibrium refers to stage of that output level at which the difference between TR and TC is positively maximized and total profits fall as more units of output are produced. After reaching such a position, there will be no incentive for the producer to increase or decrease the output and the producer will be said to be at equilibrium.


Discuss the mechanism of investment multiplier with the help of a numerical example.

Investment Multiplier refers to increase in national income as a multiple of a given increase in Investment. Its value is determined by MPC. It is denoted by 'K' where, ∆y = additional income generated ∆I = additional Investment.
Multiplier= 1/(1-MPC) = 1/MPS;where MPC= Marginal Propensity to Consume MPS = Marginal Propensity to save.

Suppose increase in investment is Rs 1000 and MPC = 0.8. The increase in national income is in the following sequence: (i) Increase in investment raises income of those who supply investment goods by Rs 1000. This is the first round increase. (ii) Since MPC = 0.8, the income earners spend Rs 800 on consumption. This raises the income of the suppliers of consumption goods by Rs 800. This is second round increase. (iii) In the similar way, the third round increase is Rs 640 = 800 × 0.8. In this way, national income goes on increasing round after round. (iv) The total increase in income is Rs 5000.


Write explanatory answer:
Explain the subjective and objective factors determining consumption function.

Factors Determining the Consumption Function:

There are a number of determinants/factors both subjective and objective which determine the position of consumption function. The factors or causes of shifts in consumption function are as follows:

(1) Subjective Factors:

(i) Psychological Characteristics of Human Nature: The subjective factors affecting propensity to consume are internal to the economic system. The subjective factors include characteristics of human nature, social practices which lead households to refrain or activate to appending out of their income.

For example, religious belief of the people towards spending, their foresight attitude towards life, level of education, etc. etc., directly affect propensity to consume or determine the slope and position of the consumptions curve. The subjective factors do not undergo a material change over a short period of time. These remain constant in the short run.

 (2) Objective Factors:

The objective factors are external to economic system. They undergo rapid changes and bring market in the consumption function. The main objective factors are as under:

(i) Real Income: Real income is the basic factor which determines community’s propensity to consume. When real income of the community increases, consumption expenditure also increases, but by a smaller amount. The consumption function shifts upward.

(ii) Distribution of wealth: If there is unequal distribution of wealth in a country, the consumption function will also be unequal. People with low income group have high propensity to consume and rich people low propensity to consume. An equal distribution of wealth raises the propensity to consume.

 (iii) Expectation Change in Price: If people expect prices are going to rise in near future, they hasten to spend large sum out of a given income just after the promulgation of first Martial Law in our country. So we can say that when prices are expected to be high in future, the propensity to consume increases or the consumption function shifts upward. When they are expected to be low, the propensity to consume decreases or the consumption function shifts downward.

(iv)Changes in Fiscal Policy: Taxes also play an important part in influencing the propensity to consume. If the nature of taxes is such that they directly affect the poor people and reduce their income, then the propensity to consume is high and if rich persons are not taxed at a progressive rate and they accumulate more wealth, then the propensity to consume is low.

(v) Change in the Rate of Interest: A change in the rate of interest exercises influence on the propensity to consume. When the interest rate is raised, it generally induces people to decrease expenditure and save more for lending purposes. On the other hand, when the interest rate is reduced, it usually encourages expenditure as lending then becomes less attractive. So we conclude that an increase in the rate of interest generally reduces propensity to consume or shifts the consumption function downward and a fall in the rate of interest usually helps to the increase of propensity to consume or shifts the consumption function upward.

(vi)Availability of Goods: Propensity to consume is also affected by the availability of consumption goods. If the goods are available in abundance, then the propensity to consume increases. If they are scarce and are priced very high, then the propensity to consume will decline.

(vii) Credit Facilities: cheap credit facilities are available in the country, the consumption function will move upward.

(viii) Higher Living Standard: If the real income of the people increases in the country and people adopt the use of new produce like television, washing machines, refrigerators, care, etc., etc., the consumption function is high.

(ix) Stock of Liquid Assets: If the consumer have greater amounts of liquid assets; there will be more desire for the households to spend out of disposable income. The consumption function shifts upward and vice versa.

(x) Consumer Indebtedness: In case the consumers are heavily indebted and they pay bigger monthly installments to replay the dept, then propensity to consume is low or the consumption function shifts downward and vice versa.

(xi) Windfall Gains: If there are unexpected gains due to stock market boom in the economy, it tends to shift the consumption function upward. They are windfall gains. The unexpected losses in the stock market lead to the downward shifting of the consumption curve.

(xii) Demographic Factors: The consumption function is also influenced by demographic factors like size of family, occupations, place of residence etc. Persons living in cities, for instance, spend more than those living in rural areas.

(xiii) Attitude towards Saving: If a community is consumption oriented, there will be less saving in the country. The consumption function shifts upward. In case, people save more and spend less, then the consumption function will shift downward.

(ix) Demonstration Effect: If people are easily influenced by advertisements on radio and television and seeing pattern of living of the rich neighbors, the level of total consumption will go up.



Give reasons or explain:
With the increase in income, both consumption and savings increase.

 

In Keynesian consumption function, consumption is assumed to vary directly with income. Specifically, consumption is assumed to increase with income, with the increase in consumption being less than the increase in income. Thus, when income increases, consumption increases at a lesser proportion than the increase in income. Because of this as income increases, the savings also increases because, the part of income which is not consumed gets saved.

Thus with increase in income, both the consumption and savings increase. 



Define marginal propensity to consume. How is it different from marginal propensity to save?

Marginal propensity to consume indicates the proportion of additional income that goes to consumption.
Marginal propensity to save indicates the ratio between additional savings and additional income.


Marginal propensity to consume can be greater than one but less than infinity. True/false

False.

MPC i.e. Marginal Propensity to Consume cannot be more than one as it is percentage change in consumption when there is some change in the level of income which cannot be more than the change in income.



What is marginal propensity to consume? How is it related to marginal propensity to save? 

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. 

MPC= change in consumption/ change in income = ^C/^Y

MPS= change in savings/ change in income = ^S/^Y

 

MPC+MPS

= ^C/^Y+ ^S/^Y

=^C+^S/ ^Y

=^Y/^Y

=1 

Hence, MPC+MPS=1. 



What is the difference between ex-ante investment and ex-post investment ?

Ex-ante investment refers to the desired investment or planned investment during the period of one year. This is the investment expenditure which is intended to be made in the economy during the period of one year. 
Ex-post investment refers to the actual investment in the economy during the period of one year. This aspect of investment is considered in the calculation of National Income. 


How are the following treated while estimating private final consumption expenditure? Give reasons for your answer.
(i) Exports.
(ii) Direct purchases made abroad by resident households.
(iii) Final consumption expenditure of non-profit institutions serving households.
(iv) Change in stocks. 

(i) Exports will not be included in private final consumption expenditure as exports do not reflect consumption expenditure by residents. 
(ii) It will be included in private final consumption expenditure as such purchases are meant for consumption. 
(iii) It will be included in private final consumption expenditure as non-profit institutions serving households are a component of household sector.
(iv) It will not be included In private final consumption expenditure as it is a component of capital formation. 


Classify the following expenditures as intermediate consumption expenditure and final consumption expenditure.
(i) Expenditure on research and development by Tata.
(ii) Insurance premium paid by a firm to an insurance company.
(iii) Insurance premium paid by households to an insurance company.
(iv) Expenditure on repairs and maintenance of plant and machinery.
(v) Expenditure incurred by a firm on purchase of equipments.
(vi) Advertising expenditure incurred by Airtel on promotion of Its products.
(vii) Business expenses of the employees on tour and entertainment. 

Intermediate Consumption Expenditure: (i), (ii), (iv), (vi), (vii); 
Final Consumption Expenditure: (iii), (v). 


The consumption function of an economy is given as: C = 60 + 0.6Y. For the given consumption function, calculate the break-even level of income.

Break even point refers to the point where the income=consumption or savings= 0. Therefore, 

   Y=C

=> Y= 60 + 0.6 Y

=> Y - 0.6Y = 60

=> 0.4 Y = 60 

=> Y = 60 / 0.4 = 150 

Hence, the break-even level of income is 150. 



 



What is consumption function?

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 
C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.


 Define marginal propensity to consume.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income to the corresponding change in consumption. 

Marginal propensity to consume= change in consumption / change in Income



Distinguish between APC and MPC. 

APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income which can be more than one as long as consumption is more than income, i.e. before the break-even point, APC > 1.

MPC i.e. Marginal Propensity to consume refers to the ratio between the percentage change in consumption for every one rupee of change in the income. It cannot be more than one as it is percentage change in consumption when there is some change in the level of income which cannot be more than the change in income.



What can be the maximum value of marginal propensity to save?

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in consumption. It can have a maximum value of one, when the whole income increase in saved, as it is percentage change in saving when there is some change in the level of income, which cannot be more than the change in income.



 If MPC is 0.75, calculate the value of MPS.

Marginal propensity to save refers to the percentage change in savings for every one rupee of change in the income. Similarly, marginal propensity to consume refers to the percentage change in consumption for every one rupee of change in the income.

$$MPC+MPS$$

$$= \dfrac{\triangle{C}}{\triangle{Y}}$$ + $$\dfrac{\triangle{S}}{\triangle{Y}}$$

$$= \dfrac{\triangle{C}+\triangle{S}} {\triangle{Y}}$$

$$= \dfrac{\triangle{Y}} {\triangle{Y}}$$
$$MPC + MPC = 1$$

$$MPS = 1- MPC$$ 

           $$= 1- 0.75$$

           $$= 0.25$$ 



What are the 2 kinds of propensities to save?

The two kinds of propensity to save are:
(i) APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income.
(ii) MPC i.e. Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. 



Calculate the marginal propensity to consume in an economy, when the MPS is 0.2.

Marginal propensity to save refers to the percentage change in savings for every one rupee of change in the income. Similarly, marginal propensity to consume refers to the percentage change in consumption for every one rupee of change in the income.

$$MPC+MPS$$

$$= \dfrac{\triangle{C}}{\triangle{Y}}$$ + $$\dfrac{\triangle{S}}{\triangle{Y}}$$

$$= \dfrac{\triangle{C}+\triangle{S}} {\triangle{Y}}$$

$$= \dfrac{\triangle{Y}} {\triangle{Y}}$$
$$MPC + MPC = 1$$

$$MPC = 1- MPS$$ 

           $$= 1- 0.2$$

           $$= 0.8$$ 



Give the meaning of ex-ante saving.

Ex-ante savings refers to the desired savings or planned savings during the period of one year. This is the savings which is intended to be made in the economy during the period of one year. 



Give the meaning of ex-ante investment. 

Ex-ante investment refers to the desired investment or planned investment during the period of one year. This is the investment expenditure which is intended to be made in the economy during the period of one year. 



Can the value of MPC be greater than one?

Marginal Propensity to consume refers to the ratio between the percentage change in consumption for every one rupee of change in the income. Therefore, it cannot be more than one as it is percentage change in consumption when there is some change in the level of income which cannot be more than the change in income.



Will a firm invest, if its marginal efficiency of investment is 12% and the rate of interest is 16%?

No, the firm will not invest. The marginal efficiency of capital/investment is the expected return from an additional unit of capital employed/investment made, while, the rate of interest specifies the returns from an interest providing security. Thus, since, the firm can earn a higher return from interest, it won't undertake additional investment in capital.


Explain, in brief, the concept of ex-ante and ex-post saving and investment. Why are ex-ante saving and ex-ante investment not always equal to each other?

Ex-ante investment refers to the desired investment or planned investment during the period of one year. This is the investment expenditure which is intended to be made in the economy during the period of one year. 

Ex-post investment refers to the actual investment in the economy during the period of one year. This aspect of investment is considered in the calculation of National Income. 

Ex-ante savings refers to the desired savings or planned savings during the period of one year. This is the savings which is intended to be made in the economy during the period of one year. 

 Ex-post savings refers to the actual savings in the economy from the given level of income  during the period of one year. This aspect of savings is considered in the calculation of National Income. 

Ex-ante savings and Ex-ante investment are not always equal because at different level of income Aggregate demand is not equal to aggregate supply. 



Which of the following cannot have a negative value? Give reasons.
(i) Average propensity to save (iiI) Marginal propensity to save.

(i) APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income which can be less than zero at income levels which are lower than the break-even point.
(ii)  Marginal Propensity to Save can be less than zero as it is percentage change in saving when there is some change in the level of income which cannot be more than the change in income.


What do you understand by ex-post saving and ex-post investment? 

Ex-post investment refers to the actual investment in the economy during the period of one year. This aspect of investment is considered in the calculation of National Income. 

Ex-post savings refers to the actual savings in the economy from the given level of income  during the period of one year. This aspect of savings is considered in the calculation of National Income. 



Explain the distinction between ex-ante measures and ex-post measures. 

Ex-ante measures refers to the desired measures planned in an economy during the period of an accounting year. 
Ex-post measures refers to the actual measures that take place in an economy during the period of an accounting year. these measures are considered into the calculation of national income in an economy. 


If households save Rs. 500 crores out of an additional income of Rs. 5,000 crores, then calculate MPC. 

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. 

Additional income= Rs. 5,000 crores and change in savings= Rs. 500 crores.

change in consumption= 5000-500 = Rs. 4,500 crores.

MPC= change in consumption/ change in income 

        = 4500/5000= 0.9



Give the meaning of propensity to save. 
Discuss in brief the two types of propensities to save. 

Propensity to save refers to the tendency  to save with the given level of income in the economy. The two propensities to save are
  • APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income.
  • Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.


Distinguish between marginal propensity to consume and average propensity to consume. Give a numerical example. 

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

APC refers to the Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. It is the between the income and it corresponding consumption. 

Income (Y)

Consumption(C)

APC= C/Y

MPC=^C/^Y

100

80

0.8

-

200

140

0.7

0.6

300

210

0.7

0.7


"The rate of increase in consumption is equal to the rate of increase in income". Do you agree with this statement?

The rate of increase in consumption might be less than the rate of increase in income as their is always some part of the income which is contributed towards savings in the economy. 


Will ex-ante saving always be equal to the ex-ante investment? 

Ex-ante investment refers to the desired investment or planned investment during the period of one year. This is the investment expenditure which is intended to be made in the economy during the period of one year. 

Ex-ante savings refers to the desired savings or planned savings during the period of one year. This is the savings which is intended to be made in the economy during the period of one year. 

Therefore, these will be equal only at the equilibrium level of income. 



Distinguish between ex-ante measure and ex-post measure of a variable. Which of the two forms the basis of the theory of national income determination?

Ex-ante measures refers to the desired measures planned in an economy during the period of an accounting year. 
Ex-post measures refers to the actual measures that take place in an economy during the period of an accounting year. these measures are considered into the calculation of national income in an economy.


From the following schedule. compute APC, APS, MPC and MPS.
Income200250300350400
Saving-5152050

Income

200

250

300

350

400

Saving

-

5

15

20

50

Consumption

200

245

285

330

350

APC

1

0.98

0.95

0.94

0.87

APS

0

0.02

0.05

0.057

0.125

MPC

-

0.9

0.8

0.9

0.4

MPS

-

0.1

0.2

0.1

0.6


Complete the following tables:
IncomeMarginal Propensity  to ConsumptionSavingAverage Propensity to Consume
0
-30-
1000.75
--
2000.75--
3000.75--

IncomeMarginal Propensity  to Consumption
SavingAverage Propensity to Consume
0
-30-
1000.75
-51.05
2000.75200.9
3000.75450.85


If the total income increases from Rs. 5,000 crores to Rs. 6,000 crores and saving Increases from Rs. 1,000 crores tot 1,500 crores, calculate MPC.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. 

Change in income= Rs. 1,000 crores and change in savings= Rs. 500 crores.

change in consumption= 1000-500 = Rs. 500 crores.

MPC= change in consumption/ change in income 

        = 500/1000= 0.5



If MPS is 0.3 and the income increases from Rs. 6,000 crores to Rs. 9,000 crores, what will be the additional consumption in the economy? 

If change in income= Rs. 3,000 crores and marginal propensity to save = 0.3
Change in savings= 3000* 0.3= Rs. 900 crores
Change in consumption= 3000-900= Rs. 2,100 crores. 


If the total increase from Rs. 5000 crores to Rs. 6000 crores and saving increases from Rs. 1000 crores to Rs. 1500 crores, calculate MPC.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. 

Change in income= Rs. 1,000 crores and change in savings= Rs. 500 crores.

change in consumption= 1000-500 = Rs. 500 crores.

MPC= change in consumption/ change in income 

        = 500/1000= 0.5



Complete the following tables:
IncomeConsumptionMarginal Propensity to SaveAverage Propensity to Consume
015--
5050--
10085--
150120--

Income

Consumption

 

Savings

Marginal Propensity to Save

Average Propensity to Consume

0

15

-15

-

-

50

50

0

0.3

1

100

85

15

0.3

0.85

150

120

30

0.3

0.8


Using the consumption function: $$ C = \bar{c}+ b(Y)$$, calculate saving at income of Rs. 2,000 crores, If autonomous consumption is Rs. 150 crores and 40% of additional income is consumed.

At income level Rs. 2,000 crores, 
Consumption= 150 + 0.4 * 2,000
                      = 150+ 800
                      = Rs. 950 crores
Savings= Income- Consumption= 2,000- 950 = Rs. 1050 crores. 


Complete the following tables:
IncomeConsumptionMarginal Propensity to SaveAverage Propensity to Save
080--
100140--
200-0-
-240-0.20
-2600.800.35

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

Marginal propensity to save = ΔS/ΔY where ΔS is the Change in savings and ΔY is the change in income in the economy.

APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income. It is expressed as the ration of saving to income in an economy. 
Average propensity to save = Savings / Income

Income

Consumption

Marginal Propensity to Save

Average Propensity to Save

 

Savings

0

80

-

-

-80

100

140

0.40

-0.40

-40

200

240

0

-0.20

-40

300

240

1

0.20

60

400

260

0.80

0.35

140



Complete the following tables:
Consumption
Expenditure (Rs.)		Saving
(Rs.)		Income
(Rs)		Marginal Propensity to Consume
10050150-
17575--
250100--
325125--

 

Consumption
Expenditure (Rs.)

Saving
(Rs.)

Income
(Rs)

Marginal Propensity to Consume

100

50

150

-

175

75

250

0.75

250

100

350

0.75

325

125

450

0.75


Complete the following tables:
IncomeSavingMarginal Propensity to ConsumeAverage Propensity to Consume
0-20--
50-10--
1000--
150

200		30

60		-

-		-

-

Income

Saving

 

Consumption

Marginal Propensity to Consume

Average Propensity to Consume

0

-20

20

-

-

50

-10

60

0.8

1.2

100

0

100

0.8

1

150

 

 

30

120

0.8

0.8

200

60

140

0.8

0.7


The saving function is given as: S.-120+ 0.4 (Y). Determine: (i) Consumption function; (ii) Consumption at income level of f 600 crores; (ii) Break-even level of income.
((i) C =120+ 0.60 (Y); (it) Rs. 480 crores; (iii) Rs.  1300 crores) 

(i) S= -120+0.4 Y
C+S=Y
=> C = Y-S 
        = Y - (-120+0.4Y)
        = Y + 120 - 0.4 Y
        = 120 + 0.6 Y
Hence, C = 120 + 0.6 Y
(ii) At income level 600 crores, 
 C= 120 + 0.6 (600) 
   = 120+ 360
   = 480 crores
(iii) Break even point refers to the point where the income=consumption or savings= 0. Therefore, 
Y=C 
=> Y= 120 +0.6 Y
=> Y- 0.6 Y=120
=> 0.4 Y = 120 
=> Y= 120/0.4 = 300 crores. 


The consumption function for an economy is given as: C = 200 + 0.8Y. (i) Determine the value of MPC and MPS; (ii) Autnomous Consumption; (iii) Derive the corresponding saving function; (iv) Calculate consumption at the income levels of Rs. 3,000 crores and Rs. 5,000 crores. (v) Determine the break-even level of income.
((i) MPC = 0.8; MPS =0.2; (ii) Autnomous Consumption = 1200 crows (iii) S = -200 + 0.20Y (iv) Rs. 2,600 crams and Rs. 4,200 crores; (v) Rs. 1,000 crores) 

(i) Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.
MPC= 0.8 


Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPS = 1 - MPC = 1- 0.8 = 0.2 


(ii) Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy. So if income is zero, then 

C = 200 + 0.8 * 0 = 200 crores 


(iii) Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value. 

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 200+0.8Y where Y is the income at different level in the economy. 

Income = consumption + savings 

=> Savings = Income - consumption 

=> S = Y- C

=> S = Y - ( 200 + 0.8Y)

=> S = Y- 200 - 0.8Y

=> S = - 200 + Y ( 1 - 0.8) 

=> S = -200 + 0.2Y 

Therefore, the saving function is S= -200 + 0.2Y  where autonomous savings= -200 crores, MPS= 0.2 and Y is income at all levels. 


(iv) At income level 3,000 crores, 

 C= 200 + 0.8 (3000) 

   = 200+ 2400

   = Rs. 2600 crores

At income level 5000 crores, 

 C= 200 + 0.8 (5000) 

   = 200+ 4000

   = Rs. 4200 crores


(v) Break even point refers to the point where the income=consumption or savings= 0. Therefore, 

Y=C 

=> Y= 200 +0.8 Y

=> Y- 0.8 Y=200

=> 0.2 Y = 200 

=> Y= 200/0.2 = 1000 crores. 



The break-even point for an economy occurs at the income level of ? 500 crores if marginal propensity to consume is 0.6, determine: (i) Autonomous consumption; (ii) Saving function; (iii) Level of Income when saving is ? 600 crores.
((i) Rs. 200 crows; (ii) - 200 + 0.4 (Y); Rs. 2000 cares) 

(i) Break even level of income refers to that income where the income=consumption or savings= 0. Therefore, 

Y=C 

=> C= 500 crores 

=> c+ 0.6 Y = 500

=> c + 0.6 (500) = 500

=> c = 500 - 300

       =200.

Therefore, autonomous consumption is 200 crores. 

C= 200 + 0.6 Y is the consumption function. 

(ii) Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value. 

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 200+0.6Y where Y is the income at different level in the economy. 

Income = consumption + savings 

=> Savings = Income - consumption 

=> S = Y- C

=> S = Y - ( 200 + 0.6 Y)

=> S = Y- 200 - 0.6 Y

=> S = - 200 + Y ( 1 - 0.6) 

=> S = -200 + 0.4 Y 

Therefore, the saving function is S= -200 + 0.4 Y  where autonomous savings= -200 crores, MPS= 0.4 and Y is income at all levels. 


(iii)When savings is 600 crores, then income will be as follow.

S= 600

=> -200 + 0.4 Y= 600

=> 0.4 Y = 800

=> Y = 800/ 0.4 = 2000 crores. 



If MPC is four times MPS and consumption at zero level of income is Rs. 70 crores, derive the consumption function. (C = 70 + 0.80 Y)

Since MPC+ MPS= 1 
=> 4MPS +MPS= 1 
=> 5 MPS =1 
=> MPS = 1/5 = 0.2 
Therefore, MPC= 0.8
 Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy. 
So, Autonomous consumption = Rs. 70 crores 

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

So, C=  70 + 0.8 Y where 70 crores=autonomous consumption, o.8= marginal propensity to consume, and Y= income.



The consumption curve makes an intercept of  Rs. 60 crores on the Y-axis. MPC:MPS can be expressed as 1:3, then derive the saving and consumption function. Also determine the level of income, when saving becomes zero?
(Saving Function: S = -60 + 0.75 (Y); Consumption Function: C = 60 + 0.25 09; Saving will become zero at income of Rs. 80 acres)

Autonomous consumption= Rs. 60 crores 
MPC/MPS= 1/3. Since
 MPC+MPS= 1 
 => MPC+ 3 MPC = 1
=> 4 MPC = 1
=> MPC = 1/4 = 0.25. 

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value. 

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

Therefore, C = 60 + 0.25 Y where  60 crores=autonomous consumption, 0.25= marginal propensity to consume, and Y= income.


Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value. 

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 60+0.25 Y where Y is the income at different level in the economy. 

Income = consumption + savings 

=> Savings = Income - consumption 

=> S = Y- C

=> S = Y - ( 60 + 0.25 Y)

=> S = Y- 60 - 0.25 Y

=> S = - 60 + Y ( 1 - 0.25) 

=> S = -60 + 0.75 Y 

Therefore, the saving function is S= -60 + 0.75 Y  where autonomous savings= -60 crores, MPS= 0.75 and Y is income at all levels. 


Break even point refers to the point where the income=consumption or savings= 0. Therefore, 

S= 0

=>  - 60 + 0.75 Y = 0

=> 0.75 Y= 60 

=> Y = 60 / 0.75 = Rs. 80 crores. 



In an economy, Investment increases by Rs. 200 crores. As a result, the total income increases by 1,000 crores. Calculate the MPC. (0.80)

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and the corresponding change in consumption.

Multiplier(k) => Change in income / change ininvestment = 1/ (1-MPC) 

                     => 1000/200 = 1/(1- MPC)

                     => 10 - 10 MPC = 2

                     => 10 MPC = 8

                     => MPC = 0.8.



In an economy, the consumption function is C = 600 + 0.9 Y, where C is consumption expenditure and is income. Calculate the equilibrium level of income and consumption expenditure, when investment expenditure is 500.
(Equilibrium level of income 11,000; Consumption expenditure = 10,500.)

At equilibrium level of output,

 AS=AD

Y= C+I 

=> Y= 600+ 0.9 Y + I 

=> Y - 0.9 Y = 600+ 500

=> 0.1 Y = 1,100

=> Y = 1,100/ 0.1 = 11,000 

At equilibrium level of Income, consumption expenditure is 

600 + 0.9 ( 11,000) 

= 600 + 9,900 

= 10,500





How much additional income will be generated in an economy with an additional investment of Rs. 100 crores and when half of increase in Income is spent on consumption? 

If half of the increase in income is spend on consumption then MPC = 0.5 

Multiplier(k) => Change in income / change ininvestment = 1/ (1-MPC)

                     => change in income/ 100 = 1/ 0.5 

                     => change in income/ 100 = 2

                     => change in income = 2 * 100 = 200 crores. 



The consumption function of an economy is given as: C = 200 + 0.75 Y. If planned investments are Rs. 500 crores, calculate equilibrium level of national income. (52,800 crores) 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> Y= 200+ 0.75 Y + I 

=> Y - 0.75 Y = 200+ 500

=> 0.25 Y = 700

=> Y = 700/ 0.25 = Rs. 2,800 crores 



Explain the concept of 'deflationary gap'. Also explain the role of 'margin requirements' in reducing it.


In the diagram, AB represents the deflationary gap or deficient demand. Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding.
Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. During deficient demand or deflation, the central bank decreases the margin in order to increase the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets increased and the deficient demand or deflationary gap is combated.

995670_1054983_ans_0e38369bad4a48c584eb1496da9b31a6.jpg


Calculate the value of multiplier, if MPC is: (i) 0.60; (ii) 0.50

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ (1- MPC)


(i) When MPC= 0.60 

k= 1/ ( 1-0.60) = 1/ 0.40 = 2.5 times 


(ii) When MPC= 0.50 

k = 1/ ( 1- 0.50 ) = 1/ 0.50 = 2 times 



Explain the meaning of under-employment equilibrium. Explain two measures by which full employment equilibrium can be reached.

Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding. Aggregate supply being perfectly elastic, it converges with aggregate demand at a lower level of output lower than the full employment level of output in the economy. This is a situation of underemployment equilibrium.
1) During deflation bank rate is decreased. As a follow-up action, the commercial banks lowers the market rate of interest. This increases the demand for credit and thus deficient demand or deflation can be combated.
2) Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. During deficient demand or deflation, the central bank decreases the margin in order to increase the credit creation capacity of the commercial bank and as a result, the money supply in an economy gets increased and the deficient demand or deflationary gap is combated.


Name the situation under which planned aggregate expenditure exceeds the equilibrium level of expenditure.

Excess demand or inflationary gap is created in an economy when the planned aggregate expenditure exceeds the equilibrium level of expenditure. The level of aggregate demand surpasses the level of aggregate supply when the available factors are fully utilized.


What is the impact of excess demand and deficient demand on the price level?

Excess demand raises the general price level (inflation), whereas, deficient demand reduces it (deflation).


Explain the meaning of inflationary gap with the help of a diagram.

EF indicates the inflationary gap in the diagram.
Inflationary gap is the excess of aggregate demand over and above the level required to maintain full employment equilibrium in the economy. It implies two things-
1) Planned aggregate demand in the economy happens to exceed its full employment level.
2) The level of aggregate demand surpasses the level of aggregate supply even when the available factors are fully utilized.


Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium: 
National income = Rs. 2,000
Autonomous consumption expenditure  = Rs. 200
Investment expenditure = Rs. 100 
(Marginal Propensity to Consume = 0.85) 

 Consumption Function, C = 200+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 2,000 = 200 + b (2,000)  + 100

=> 2,000 = 300+ 2,000 b 

=> 2,000 b = 2,000 - 300 

=> b = 1,700/ 2,000  = 0.85.



Calculate equilibrium national income from the following: 
(i) Consumption expenditure at zero income  Rs.60
(ii) Marginal propensity to consume 0.9
(iii) Investment Rs. 100
(Equilibrium level of income =Rs. 1,600)

The Consumption Function, C = 60+ 0.9 Y where Y in the income in the economy. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> Y= 60 + 0.9 Y + 100

=> Y - 0.9 Y = 60 + 100

=> 0.1 Y = 160

=> Y = 160/ 0.1 = Rs. 1,600.



In an economy the autonomous investment is 60 and the marginal propensity to consume is 0.If the equilibrium level of Income is 400, then the autonomous consumption isTrue or False? Justify your answer. 
(False. The given value of autonomous consumption is Incorrect. The correct value is 20)

Consumption Function is C = c + 0.8 Y where Y in the income in the economy and c= Autonomous consumption. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 400 = c + 0.8  (400)  + 60

=> 400 = c+ 320 + 60 

=> 400 = c+ 380

=> c = 400 - 380 = 20.

Hence, autonomous consumption at equilibrium will be 20. 



Calculate equilibrium level of income from the following: 
(i) Consumption expenditure at zero income  Rs. 40
(ii) Marginal Propensity to Consume 0.8
(iii) Investment Rs. 80
(Equilibrium level of income =Rs. 600)

Consumption Function, C = 40+ 0.8 Y where Y in the income in the economy. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> Y= 40 + 0.8 Y + 80

=> Y - 0.8 Y = 40 + 80

=> 0.2 Y = 120

=> Y = 120/ 0.2 = Rs. 600.  



An economy is in equilibrium. Its national is Rs. 5,000 and autonomous consumption expenditure isWhat is the total consumption expenditure if marginal propensity to consumer is 0.7?

If Autonomous consumption is Rs. 500 and MPC= 0.7, then 
Consumption Function, C = 500+ 0.7 Y where Y in the income in the economy. 
So at national income Rs. 5,000, consumption is 
 C = 500+ 0.7 ( 5,000) 
    = 500 + 3,500 
    = Rs. 4,000. 



Calculate Marginal Propensity to consume from the following:
(i) Consumption expenditure at zero income Rs. 70
(ii) Equilibrium income  Rs.700
(iii) Investment Rs. 140
(Marginal Propensity to Consume = 0.7)

The Consumption Function is C = 70+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 700 = 70 + b (700)  + 140

=> 700 = 210+ 700 b 

=> 700 b = 700 - 210 

=> b = 490/700  = 0.7.



Calculate Marginal Propensity to Consume from the following:
(i) Equilibrium income                                         Rs. 350 
(ii) Consumption expenditure at zero income        Rs. 20
(iii) Investment                                                        Rs. 50

 Consumption Function, C = 20+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 350 = 20 + b (350)  + 50

=> 350 = 70+ 350 b 

=> 350 b = 350 - 70 

=> b = 280/ 350  = 0.8.



Calculate marginal propensity to consume from the following date about an economy which is in equilibrium.
National Income = Rs. 1,500
Autonomous Consumption Expenditure = Rs. 300 
Investment Expenditure = Rs. 300

 Consumption Function, C = 300+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 1,500 = 300 + b (1,500)  + 300

=> 1,500 = 600+ 1,500 b 

=> 1,500 b = 1,500 - 600 

=> b = 900/ 1,500  = 0.6.



Calculate 'Investment' from the following:
(i) Equilibrium income                                        Rs. 500
(ii) Consumption expenditure at zero income      Rs. 50
(iii) Marginal propensity to consume                           0.7

(i)  Consumption Function, C = 50+ 0.7 Y where Y in the income in the economy. 

At equilibrium,

 AS=AD

Y= C+I 

=> 500= 50 + 0.7 ( 500) + I 

=> 500 = 50 + 350 +I

=> 500 = 400 + I 

=> I = 500- 400 = 100

Hence, Investment is Rs. 100 at equilibrium. 





Calculate autonomous consumption expenditure from the following date about an economy which is In equilibrium.
National income = Rs. 1,200
Marginal propensity to save = 0.20
Investment expenditure = Rs. 100 
(Autonomous Consumption Expenditure = 140)

If MPS=0.20, then 

MPC= 1-MPS= 1-0.20= 0.80 

Consumption Function is C = c + 0.80 Y where Y in the income in the economy and c= Autonomous consumption. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 1,200 = c + 0.80  (1,200)  + 100

=> 1,200 = c+ 960 + 100 

=> 1,200 = c+ 1,060

=> c = 1,200- 1,060 = Rs.140 



An economy is in equilibrium. Calculate Autonomous Consumption from the following:
National Income   = 1250
Marginal Propensity to Save = 0.2
Investment Expenditure  = 150

If MPS=0.2, then 

MPC= 1-MPS= 1-0.2 = 0.8 

Consumption Function is C = c + 0.8 Y where Y in the income in the economy and c= Autonomous consumption. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 1,250 = c + 0.8  (1,250)  + 150

=> 1,250 = c+ 1,000 + 150 

=> 1,250 = c+ 1,150

=> c = 1,250- 1,150 = 100. 



An economy is in equilibrium. Calculate national income from the following:
Autonomous consumption = 100
Marginal propensity to save = 0.2
Investment expenditure = 200 
(National Income = 1,500) 

If MPS= 0.2, then 

MPC=1- MPS= 1-0.2= 0.8.

Consumption Function is C = 100+ 0.8 Y where Y in the income in the economy.

 At equilibrium level of income,

 AS=AD

Y= C+I 

=> Y= 100 + 0.8 Y + 200

=> Y - 0.8 Y = 100 + 200

=> 0.2 Y = 300

=> Y = 300/ 0.2 = Rs.1,500. 



An economy is in equilibrium. Calculate the Marginal Propensity to Save from the following:
National income  = 1000
Autonomous Consumption = 100
Investment = 120

 Consumption Function, C = 100+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 1,000 = 100 + b (1,000)  + 120

=> 1,000 = 220+ 1,000 b 

=> 1,000 b = 1,000 - 220 

=> b = 780/ 1,000  = 0.78. 

Since MPC = 0.78,

 MPS = 1- MPC

          = 1- 0.78 = 0.22.

                          



S = -100 + 0.2 Y Is the saving equilibrium level of income. Investment expenditure is 5,Calculate the equilibrium level of income.
(Equilibrium Level of Income = 25,500) 

At equilibrium level of income, Savings = investment 
=>−100 +0.2Y=5,000
=>0.2Y = 5,000 + 100
=>0.2Y= 5,100
=> Y= 5,100 / 0.2 = 25,500 


Suppose marginal propensity to consume is 0.How much increase in investment is required to increase national income by Rs. 2,000 crore? Calculate.
(Increase in investment = Rs.400 Croce)

If MPC= 0.8, then 
MPS = 1- MPC = 1-0.8 = 0.2. 

Multiplier(k) => 2,000 / change in investment = 1/ MPS 

                     => 2,000 / change in investment  = 1/0.2

                     => 2,000 / change in investment  = 5

                     => change in investment = 2,000 / 5  = Rs. 400 crores.



An economy is in equilibrium. Find Marginal Propensity to Consume from the following: 
National income = 2000
Autonomous consumption = 400
Investment expenditure  = 200

 Consumption Function is  C = 400+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 2,000 = 400 + b (2,000)  + 200

=> 2,000 = 600+ 2,000 b 

=> 2,000 b = 2,000 - 600 

=> b = 1,400/ 2,000  = 0.7. 



In an economy, 20 percent of increased Income is saved. How much will be the increase in Income if investment Increases by 10,000? Calculate.
(Increase in Income = 50,000)

If 20 % of the income is save then MPS =0.2.

Multiplier(k) => Change in income / change in investment = 1/ MPS 

                     => change in income/ 10,000 = 1/0.2

                     => change in income/ 10,000 = 5

                     => change in income = 5 * 10,000 = 50,000

Hence, national income is increased by 50,000. 



Calculate the equilibrium level of income in the economy, if C = 500 + (0.9) Y; and Investment Expenditure = 3,000. 
(Equilibrium Level of Income = 35.000)

Consumption Function is C = 500+ 0.9 Y where Y in the income in the economy.

 At equilibrium level of income,

 AS=AD

Y= C+I 

=> Y= 500 + 0.9 Y + 3,000

=> Y - 0.9 Y = 500 + 3,000

=> 0.1 Y = 3,500

=> Y = 3,500/ 0.1 = 35,000. 



In an economy, investment increases from 300 toAs a result of this, equilibrium level of income increases by 2,Calculate the marginal propensity to consume.
(Marginal Propensity to Consume = 0.9) 

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

Multiplier(k) => Change in income / change in investment = 1/ (1-MPC) 

                     => 2,000/200 = 1/(1- MPC)

                     => 10 - 10 MPC = 1

                     => 10 MPC = 9 

                     => MPC = 0.9.



An economy is in equilibrium. Calculate Marginal Propensity to Consume:
National Income = 1,000
Autonomous Consumption Expenditure = 200
Investment Expenditure = 100 
(Marginal Propensity to Consume = 0.70)

Consumption Function is C = 200+ b Y where Y in the income in the economy and b= marginal propensity to consume. 

At equilibrium level of output,

 AS=AD

Y= C+I 

=> 1,000 = 200 + b (1,000)  + 100

=> 1,000 = 300+ 1,000 b 

=> 1,000 b = 1,000 - 300 

=> b = 700/ 1,000  = 0.7. 



Explain equilibrium level of national income using Savings and Investment approach. Draw diagram in support of your explanation.

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at E1  where savings intersects investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach E1, S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I.



1006510_1057426_ans_12218c353dc04e5ebe0dcecf8d89cb3d.png


From the following data calculate the equilibrium level of national income:
Autonomous Consumption = 500
Marginal Propensity to Save = 0.2
Investment = 2,000 
(Equilibrium Level of National Income = 12,500) 

If MPS=0.2, then 

MPC= 1-MPS= 1-0.2= 0.8

Consumption Function is C = 500+ 0.8 Y where Y in the income in the economy.

 At equilibrium level of income,

 AS=AD

Y= C+I 

=> Y= 500 + 0.8 Y + 2,000

=> Y - 0.8 Y = 500 + 2,000

=> 0.2 Y = 2,500

=> Y = 2,500/ 0.2 = 12,500 


If marginal propensity consume is 0.8, how much will be the value of investment multiplier? Calculate.
(Investment Multiplier = 5)

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

If MPC= 0.8, then 
Multiplier(k) = 1/( 1 - 0.8) = 1/ 0.2 = 10/2 = 5 times. 


Explain the meaning of investment multiplier. What can be its minimum value and why?

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

The minimum value of K is one because there can be only one time change in the income if the is some change in the investment. 



Short Answer Type Question:
Can an economy be in equilibrium when there is unemployment in the economy. Explain.

Yes an economy can be in equilibrium when there is unemployment in the economy when the aggregate demand= aggregate supply in the economy. It refers to a situation when aggregate demand is equal to the aggregate supply at a level where the resources are not fully employed.


If in an economy: (a) Consumption function is given by C = 100 + 0.75 Y, and (b) Autonomous Investment Is 150 crores. Estimate (I) Equilibrium level of Income and (ii) Consumption and Savings at the Equilibrium Level of Income.
((i) Rs. 1,000 crores; (ii) Consumption = Rs. 850 crores, Savings= Rs. 150 crass) 

(I) Consumption Function is C = 100+ 0.75 Y where Y in the income in the economy.

 At equilibrium level of income,

 AS=AD

Y= C+I 

=> Y= 100 + 0.75 Y + 150

=> Y - 0.75 Y = 100 + 150

=> 0.25 Y = 250

=> Y = 250/ 0.25 = Rs. 1,000 crores 

(II) Consumption Function is C = 100+ 0.75 Y where Y in the income in the economy.

 At equilibrium level of income,

C= 100 + 0.75 ( 1,000)

   = 100 + 750 

   = Rs. 850 crores 

Savings = Investments 

              = Rs. 150 crores



Briefly discuss the concept of over full employment equilibrium. Use diagram. 

Over full employment equilibrium refers to a situation, when Aggregate demand is equal to Aggregate supply beyond the full employment level of output in the economy which is expected in the long term potential output. 

 In Figure , AD, = AS at point ‘G’ which is higher than the full employment level.

 As OQ, is more than OQ, point ‘G’ signifies the over full employment equilibrium.


1006088_1057420_ans_9e957dd8c19446b89fa487a71dd9cb32.jpg


In an economy, investment increased by 1,100 and as a result of it, income increased by 5,Had the marginal propensity to save been 25 percent, what would have been the increase in income? 
(Increase in Income = 4,400) 

Multiplier(k) => Change in income / change in investment = 1/ MPS 

                     => change in income/ 1,100 = 1/0.25 

                     => change in income/ 1,100 = 4

                     => change in income = 4 * 1,100 = 4,400 

Hence, income increases by 4,400.. 



Using the 'saving and investment' approach explain how is the equilibrium level of national income determined? Also explain what will happen if the equilibrium condition is not fulfilled.

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at E1  where savings intersects investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach E1, S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I.
1006512_1057428_ans_4720c081e2014fe7b972c52b96dcea1e.png


Discuss, in brief, the state of full employment equilibrium with the help of a diagram.

The full employment level of equilibrium is reached only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS. 
When AD is more than AS (say, at point R), then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS. 
When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 
So, full employment level of equilibrium will take place only at point K, when AD = AS where all the capable and willing people get job at the existing wage rate. 
1006072_1057419_ans_71ee95f90ecc485ab3a092934d6d3d50.png


What is investment multiplier? How is its value determined? What can be its minimum and maximum value? 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

k = Change in income/ change in investment = 1/ Marginal propensity to save = 1/ ( 1- Marginal propensity to consume )



Explain the relationship between MPC and multiplier with the help of an example.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

Multiplier(K) = 1/ (1- MPC) = 1 / (1 - Change in consumption/ change in income) 

   = change in income/ change in income- change in consumption

   = change in income/ change in savings 

   = change in income/ change in investment 

For example, If MPC= 0.8 then 

Multiplier(K) = 1/ (1- 0.8) = 1 / (1 - 8/ 10) 

   = 10/ 10- 8

   = 10/ 2  = change in income/ change in investment

   = 5 times 

Therefore, Change in income = 10 and change in investment = 2 



Explain the working of investment multiplier with the help of a numerical example.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment. For example investment is increased by 1,000 crore rupees, now


 

Particulars

Increase in Income
(Rs. Crores)

Change in Consumption
(Rs. Crores)

Change in Saving
(Rs. Crores)

Fist Round

1000

800

200

Second Round

800

640

160

Third Round

640

512

128

All other Rounds 

2,560

2,048

512

Total

5,000

4,000

1,000


(a) In the multiplier process, increase in income in the first round is always equal to additional investment. So, Increase in income in the first round =Rs.1,000=Rs.1,000 crores. 

(b) The saving off  Rs. 200 crores indicates that increase in consumption will be Rs. 800 crores in the first round. 
- additonal consumption of Rs. 800 crores out of an additional income of Rs. 1,000 indicates that 80% of income is spent, Le. MPC = 0.8. The values of second and third round are calculated on the basis of this data. 

(c) Total Increase in Income = Additional Investment x kxk. In the given case: 
Multiplier (k)=11−MPC=11−0.8=5(k)=11−MPC=11−0.8=5
So, Total Increase in Income =1,000×5=Rs.5,000 crores=1,000×5=Rs.5,000crores

(d) Total Increase in Consumption == Total increase in Income ×× MPC =5,000 x 0.8=Rs.4,000 crores=5,000x0.8=Rs.4,000crores.

(e) Total Increase in Saving == Total Increase in Income −− Total Increase in Consumption =5,000−4,000=1,000 crores=5,000−4,000=1,000crores.

(f) Values of All other Rounds' is calculated after subtracting the values of first, second and third round from the total increase in income, consumption and saving respectively. 


Explain the meaning of equilibrium level of income and output using saving and investment approach. Use a diagram.

According to this approach of equilibrium, the equilibrium level of income or output is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at E1  where savings intersects investment curve At this point, I=S.
When S is more than I, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach E1, S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I.


1006525_1057438_ans_956155b6c22d4a79b124449afbf9082f.png


"The size of multiplier varies directly with the size of the MPC". Defend or refute.

Multiplier(K)= 1/ (1- MPC) = 1 / (1 - Change in consumption/ change in income) 

   = change in income/ change in income- change in consumption

   = change in income/ change in savings 

   = change in income/ change in investment 

So, the value of the multiplier and MPC are directly related as the change in consumption in respect to a given change in income becomes the change in  investment which keeps on rotating unless the income becomes zero.



Discuss the meaning of investment multiplier. What can be its minimum and maximum value?

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

k= change in income / change in investment.

The minimum value of the multiplier can be 1 when there is one time change in income or when MPC= 0 and the maximum value of the multiplier can be Infinity when there in infinite times of change in income or MPC=1. 



Explain the meaning of under-employment equilibrium. 

An economy can be in equilibrium when there is unemployment in the economy when the aggregate demand= aggregate supply in the economy. It refers to a situation when aggregate demand is equal to the aggregate supply at a level where the resources are not fully employed.


Long Answer Type Questions:
Explain determination of equilibrium level of income using 'Consumption plus Investment' approach. Use diagram.

According to this approach , the equilibrium is reached only when aggregate demand (AD= consumption+ Investment) equals aggregate supply (AS) because at this level there is no tendency for income and output to change. 
In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS. 
When AD is more than AS (say, at point R), then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS. 
When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 
So, equilibrium takes place only at point K, when AD = AS.


1006520_1057434_ans_380d5882fd954793bde583ea0111995e.png


Explain, with the help of a diagram, how equilibrium level of income is determined considering aggregate demand and aggregate suppl.

The equilibrium is determined only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change. 
In the diagram, the equilibrium is at K where AD intersects 45 line. At this point, AD = AS. 
When AD is more than AS, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. The rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach E, where AD = AS. 
When AD is less than AS, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 
So, equilibrium takes place only at point K, when AD = AS.


1006522_1057436_ans_281f6538534341dba62b665342360c86.png


What changes will take place to bring an economy in equilibrium if: (i) planned savings are greater than planned Investment; (ii) planned savings are less than planned investment.

(i) When planned savings is more than planned investment , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach a point where S=I.
(ii) When planned savings is less than planned investment, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.


Explain the determination of equilibrium level of national income using 'saving and investment approach. Use diagram. Also explain the effects if saving is greater than investment.

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change.  
In the diagram the equilibrium is at E where savings intersects investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till they reach E, S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point E, when S=I.


1006631_1057451_ans_575d0143526e47259945a175f0fd70f0.png


The value of marginal propensity to consume is double the value of marginal propensity to save.
Find the value of multiplier. 

Given :  MPC = 2 MPS.
Since, MPC + MPS = 1 
        => 2 MPS + MPS = 1 
        => 3 MPS = 1 
        => MPS = 1 
=> MPC = 1 - MPS = 1 - ( 1/3 ) = 2/3 

Multiplier(K) = 1/ (1- 2/3) = 1 / (3 - 2/ 3) 

   = 3/ 3- 2

   = 3/1  

   = 3 times 



"Economists are generally concerned about the rising Marginal Propensity to Save (MPS) in an economy". Explain why ?

Since the sum of MPC and MPS is unity, any increase in Marginal Propensity to Save (MPS) would directly lead to a decrease in Marginal Propensity to Consume (MPC).
So a decrease in MPC will lead to decrease in consumption which wil decrease the overall aggregate demand of the economy which will lead to decrease in the equilibrium level of income or output. 


What is the range of values of investment multiplier? Clarify the relation of investment multiplier with marginal propensity to consume (MPC) and with marginal propensity to save (MPS).

The range of investment multiplier is from one to infinity. The minimum value of the multiplier can be 1 when there is one time change in income or when MPC= 0 and the maximum value of the multiplier can be Infinity when there in infinite times of change in income or MPC=1. 

The value of the multiplier and MPC are directly related as the change in consumption in respect to a given change in income becomes the change in  investment which keeps on rotating unless the income becomes zero Where as the value of multiplier and MPS are inversely related as multiplier is the reciprocal of MPS. 



Why must aggregate demand be equal to aggregate supply at the equilibrium level of Income and output? Explain with the help of a diagram.

According to AD= AS approach, the equilibrium is determined  only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change and the economy may achieve full employment equilibrium. 
In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS. 
When AD is more than AS (say, at point R), then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS. 
When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 
So, equilibrium takes place only at point K, when AD = AS.


1006717_1060737_ans_ef8a6fce2c1f489f812aa938a13688f3.png


Calculate the additional investment needed if the equilibrium level of income falls short by Rs. 1,000 crores. It is given that consumption function is given as: $$C = 120 + 0.8\,Y$$ .

If MPC= 0.8, then 

Multiplier(k) => 1,000 / change in investment = 1/ (1-MPC)

                     => 1,000 / change in investment  = 1/ (1- 0.8 ) 

                     => 1,000 / change in investment  = 1/ 0.2

                      => 1,000 / change in investment  = 5 

                     => change in investment = 1,000 / 5  = 2,00. 

Hence, Rs. 200 investment is needed to make the income adequate. 



Assuming that increase in investment is Rs. 1,000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.

Multiplier(k) => Change in income / 1,00 = 1/ (1-MPC) 

                     => Change in income / 1,000  = 1/ (1- 0.8) 

                     => Change in income / 1,000  = 1/ 0.2 

                     => change in income  = 5 (1,000)  = 5,000 crores

K= change in income/ change in investment = 5,000 /1,000 = 5 times 



Explain the relationship between MPC and multiplier with the help of an example. 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

Multiplier(K) = 1/ (1- MPC) = 1 / (1 - Change in consumption/ change in income) 

   = change in income/ change in income- change in consumption

   = change in income/ change in savings 

   = change in income/ change in investment 

For example, If MPC= 0.8 then 

Multiplier(K) = 1/ (1- 0.8) = 1 / (1 - 8/ 10) 

   = 10/ 10- 8

   = 10/ 2  = change in income/ change in investment

   = 5 times 

Therefore, Change in income = 10 and change in investment = 2 



When investment multiplier is 1, the value of marginal propensity to consume is zero. 

True.
When k= 1, then

Multiplier(k) = 1/( 1 - MPC)

 =>  1/ (1-MPC ) = 1

=> 1= 1- MPC 

=> MPC = 1-1 = 0. 



Explain 'Paradox of Thrift'.

The 'Paradox of Thrift' was propounded by J.M. Keynes who defined the relationship between change in savings and its effect on the economy as paradoxical in nature. According to Keynes, when people start saving money instead of spending it, that increases MPS . Rise in MPS means a fall in MPC. When MPC falls, aggregate consumption expenditure in the economy falls. It leads to rise in inventory level of producers. To clear the unwanted increase in inventory, firms would plan to reduce the production. It will reduce the demand for factor services and factor Incomes. As a result the total volume of saving generated in the economy would fall (or remain unchanged).


Is it necessary that equality between AD and AS is established at the full employment level? 

No, the equilibrium level on income may be determined at a level less than full employment where the market is clear even in under utilization of resources , more than the full employment where market is clear even if resources are over utilized or equal to level of full employment. 


If MPC and MPS are equal, what is the value of the multiplier?

If MPC= MPS, then
MPC+MPS= 1 
 =>2 MPS= 1 
=> MPS =1/2 =0.5 
Multiplier (k) = 1/MPS = 1/ 0.5 = 2


What are the two approaches for determining the equilibrium level of income? 

The two approaches of determining the equilibrium level of income are 
(i) AD and AS approach, where the equilibrium is reached only when aggregate demand (AD) is equals to  aggregate supply (AS) because at this level there is no tendency for income and output to change. 
(ii) S and I approach, where the equilibrium is reached only when Investment(I) is equals to Savings(S) because at this level there is no excess savings or investment in the economy and the planned output is cleared by the market demand. 


 What is the meaning of over full employment equilibrium?

Over full employment level of equilibrium refers to the situation where aggregate demand is equal to the aggregate supply when there is over utilization of all the sources in the economy. 


 What is under employment equilibrium? 

Under employment level of equilibrium refers to the situation where aggregate demand is equal to the aggregate supply when there is under employment in the economy i.e. all willing and capable people do not get job at the existing wage rate and the resources are under utilized. 


What Is the relationship between marginal propensity to save and multiplier?

The value of the multiplier and marginal propensity to consume are inversely related. So increase in MPS will lead to a decrease in the value of multiplier and vice-versa. 
Multiplier (k) = 1/ MPS 


How is the equilibrium level of income attained through saving and investment approach? 

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) equals Savings(S) because at this level there is no tendency for income and output to change. 
The equilibrium is where savings intersects investment curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in I and rise in income means rise in S. Both continue to rise till S=I. 
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point where S=I.



An increase of Rs. 100 crores in investment leads to a rise of Rs. 500 crores in the national income. Calculate the value of multiplier. 

Investment multiplier refers to the number of times by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier ($$k$$) $$= \dfrac{Change\ in\ income} {Change\ in\ investment}$$

                    $$= \dfrac{500} {100}$$ 

                    $$= 5$$ 

  



How is the equilibrium level of income attained through AD and AS approach?

According  AD and AS approach, the equilibrium is reached only when aggregate demand (AD) equals aggregate supply (AS) because at this level there is no tendency for income and output to change. 
 The equilibrium is where AD intersects 45 line. At this point, AD = AS. 
When AD is more than AS , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till AD = AS.

When AD is less than AS, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS. 

So, equilibrium takes place only at point , where AD = AS.



What is the value of multiplier when Marginal Propensity to Save is zero?

 If MPS= 0, then MPC =1- MPS = 1- 0 = 1. So,
 Multiplier(k) = 1/ (1-MPC)
                      = 1/(1-1) 
                      = 1/0
                      = Infinity


Assuming that increase In Investment is Rs. 1.000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.

Multiplier(k) => Change in income / 1,000 = 1/ (1-MPC)

                     => Change in income / 1,000  = 1/(1-0.9) 

                     => Change in income / 1,000  = 1/ 0.1 

                     => Change in income / 1,000  = 10

                     => change in income  = 10 (1,000)  = Rs.10,000 crores.



What can be the minimum value of investment multiplier?

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

The minimum value of the multiplier can be 1 when there is one time change in income or when MPC= 0.
 Multiplier(k) = 1/ (1-MPC)
                      = 1/(1-0) 
                      = 1/1
                      = 1



If the value of marginal propensity to consume is 0.calculate the value of multiplier.

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

 If MPC = 0.8, then 
 Multiplier(k) = 1/ (1-MPC) = 1/(1-0.8) = 1/0.2= 5 


 If Investment multiplier is 1, what will be the value of marginal propensity to consume? 

The value of the multiplier will be 1 when there is one time change in income or when MPC= 0.
 Multiplier(k) = 1/ (1-MPC)
                      = 1/(1-0) 
                      = 1/1
                      = 1


Short Answer Type Questions:
Can an economy be In equilibrium when there is unemployment in the economy. Explain.

Yes an economy can be in equilibrium when there is unemployment in the economy when the aggregate demand= aggregate supply in the economy. It refers to a situation when aggregate demand is equal to the aggregate supply at a level where the resources are not fully employed.


Calculate the values of multiplier if the MPS is:
(a) 0.40; (b)  Equal to MPC

(a) If MPS = 0.40, then 
Multiplier (k) = 1/MPS = 1/ 0.40 = 2.5 
(b) If MPC= MPS, then 
2 MPS= 1 
=> MPS =1/2 =0.5 
Multiplier (k) = 1/MPS = 1/ 0.5 = 2 



Calculate multiplier if MPC is : (i) 0.75; (ii) 0.90

(i) If MPC = 0.75, then 
 Multiplier(k) = 1/ (1-MPC) = 1/(1-0.75) = 1/0.25 = 4 
(ii) If MPC = 0.90, then 
 Multiplier(k) = 1/ (1-MPC) = 1/(1-0.90) = 1/0.10 = 10 


Discuss the adjustment mechanism in the following situations :
Ex-Ante Investments are greater than Ex-Ante Savings.

(b) Ex-Ante Investments are greater than Ex-Ante Savings: The situation when Ex-ante investment (I) exceeds Ex-Ante saving (S) i.e. when injections into the circular flow of income is greater than withdrawal from the income, then it implies that total consumption expenditure is greater than what is required to purchase the available supply of goods and services. In other words, we can understand this as low saving implies high consumption, which means that the required output is more than the planned output. Thus, there will be unplanned depletion of inventory (or unplanned dis-investment). In response to this, to increase the stock of output, the producers plan to expand production in the next period; thereby increase the employment of factors of production. The increased employment leads to rise in aggregate income in the economy, consequently, higher aggregate saving. The saving will continue to rise, until, it becomes equal to the investment. At a point, where saving and investment are equal, equilibrium is achieved. This process of the adjustment mechanism is explained below graphically. 
Refer image,
In the figure, S and I represent the Saving and Investment curves. Let us suppose that the equilibrium is facing a situation, where investment (TY") exceeds saving (KY'). Consequently, the aggregate consumption expenditure is higher than what is required to buy all the goods and services. Therefore, there exists unplanned depletion of inventory or unplanned dis-investment by TK (i.e. TY' - KY') and the producers respond by increasing the production by hiring more factors of production. Consequently, the employment increases and the income of the factors (of the people) rise. Subsequently, the saving rises due to increased income. Hence, the saving will continue to rise, until, saving equates investment at point E. The economy achieves equilibrium at point E, with saving equal to investment and OY level of national income (or output). 

1957641_1943997_ans_65552ac337074be5addd3c257096e90c.png


Answer the following question in $$12$$ sentences.
Write a table to show the impact of simultaneous shifts on equilibrium.

Impact of Simultaneous Shifts on Equilibrium:
 Shift in Demand Shift in Supply Quantity Price
Leftward   Leftward DecreasesMay increase, decrease or remain unchanged 
 Rightward  Rightward Increases May increase, decr
 Leftward  RightwardMay increase, decrease or remain unchanged  Decreases
  Rightward LeftwardMay increase, decrease or remain unchanged  Increases



In an economy investment is increased by $$Rs 300$$ crore. If marginal propensity to consume is $$2/3$$, calculate increase in national income.

Given 
$$MPC=\dfrac{2}{3}=0.67$$
$$\Delta I=Rs.300$$ crore
Working
$$k=\dfrac{1}{1-MPC}=\dfrac{1}{1-0.67}=3.03$$

$$k=\dfrac{\Delta Y}{\Delta I}$$

$$3.03=\dfrac{\Delta Y}{300}$$

$$\Delta Y =Rs.909$$ crore


Answer the following question in $$4$$ sentences.
Give the meaning of investment multiplier. Write its formula.

The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called investment multiplier. 
The Investment Multiplier= ∆Y/ ∆I = I / I-C = I / F


Answer the following question in $$12$$ sentences.
Briefly explain consumption function.

Consumption Function : The relationship between the consumption expenditure and the income is known as Consumption Function. 
C = f(Y) 
Where C = Consumption Expenditure 
f = Function 
Y = Income 
Algebraic Expression of Consumption Function :The algebraic expression of Consumption Function is given by : 
C = C + b(Y) 
Here, C = Consumption Expenditure 
C = Minimum Level of Consumption at zero income 
b = Marginal Propensity to consume 
Y = Income 
It is of two types : 
(i) Average Propensity to Consume (APC) : The ratio between the consumption expenditure and income is called Average Propensity to Consume.
(ii) Marginal Propensity to Consume (MPC) : The ratio between the change in consumption expenditure with change in income is called Marginal Propensity to Consume.


State the meaning of the following :
(a) Ex-Ante Savings
(b) Full Employment
(c) Autonomous Consumption

(a) Ex-ante saving: The saving which the firms or entrepreneur desire to maker in the economy during a period is called ex-ante (planned savings). 

(b) Full employment: It refers to the situation when all the workers who are willing and able to work at prevailing wage rate are actually employed. 

(c) Autonomous consumption: When income is zero, consumption is not zero because consumption can never be zero even at zero level of income; there are some basic needs which need to be fulfilled even at zero level of income and to fulfil those basic needs we use past savings. This consumption at zero level of income is termed as “Autonomous consumption” and is denoted as bar C. 



Calculate Marginal Propensity to consume from the following data about an economy which is in equilibrium:
National income                                    =2000
Autonomous consumption expenditure=200
Investment expenditure                        =100                      

Given:
National income(Y)=2000
Autonomous consumption expenditure=200
Investment expenditure=100
In an equilibrium, we have:
$$Y=C+I$$
since $$C=\bar C+cY$$, we have
 $$Y=\bar C+cY+1$$
$$\Rightarrow 2000=200+c(2000)+100$$
$$\Rightarrow1700=2000c$$
$$\Rightarrow=0.85$$
 Therefore, the marginal propensity to consume is 0.85.


Value of Marginal Propensity to Consume (MPC) varies between ________ and _______.

Value of Marginal Propensity to Consume (MPC) varies between 0 and 1.
Higher the MPC, higher is the value of Multiplier. 


How is the MPC of poor is more than that of rich?

Such situation happens because poor people spend a greater percentage of their increased income on consumption as most of their basic needs remain unsatisfied.


The summation of Marginal Propensity to Consume (MPC) and ____ have the value of equal to 1.

We know that: Consumption (C) + Savings (S) = Income (Y).
Symbolically, C + S = Y,
Change in C + Change in S = Change in Y,
Now, dividing both sides by change in Y both sides,
Change in C/Change in Y + Change in S/Change in Y = Change in Y/Change in Y,
MPC + MPS = 1. [Change in C/Change in Y = MPC, Change in S/Change in Y = MPS].
The summation of Marginal Propensity to Consume (MPC) and Marginal Propensity to Consume (MPS) have the value of equal to 1.


Equilibrium occurs when ex-ante saving is equal to ________.

Equilibrium occurs when ex-ante saving is equal to ex-post saving. At any level of income, ex-post savings are always equal to ex-post investment. The significance of distinction between ex-ante and ex-post is that in the theory of determination of income, all variables are ex-ante (planned) variables. Planned saving and Planned investment.


If MPC is equal to 0.60, then MPS is equal to _______.

IF MPC is equal to 0.60, then MPS is equal to 0.40. Marginal Propensity to Consume The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume. Marginal Propensity to Save The ratio between the change in savings with the change in income is known as Marginal Propensity to Save. MPC +  MPS = 1. MPS = 1 - MPC = 1 - 0.60 = 0.40.


____________ refers to actual savings in an economy during a year.

Ex post savings refers to actual savings in an economy during a year. Ex-post savings refers to the actual savings in the economy from the given level of income  during the period of one year. This aspect of savings is considered in the calculation of National Income.


If MPC and MPS are equal, then the value of the multiplier is _________.

If MPC and MPS are equal, then the value of the multiplier is 2.
Explanation: MPC + MPS = 1.
MPC + MPC = 1 [MPC = MPS]
2MPC = 1.
MPC = 1/2 = 0.5.
K (Investment Multiplier) = 1/(1 - MPC) = 1/(1 - 0.5) = 1/0.5 = 2.


Distinguish between Aggregate Demand (AD)  and Aggregate Supply (AS).

Aggregate demand is the gross amount of services and goods demanded for all finished products in an economy. It is driven by capital goods, all consumer goods, imports, exports and government spending programs. 
Aggregate supply is the total supply of services and goods at a given price and in a given period and is driven by savings and consumption and is driven by savings and consumption.
Following are the differences:

 Characteristics Aggregate Demand Aggregate Supply
 DefinitionIt is the gross amount of services and goods demanded for all finished products in an economy.
It is the total supply of services and goods at a given price and in a given period.
 FactorsIt is affected by variances in interest rates, variations in inflation expectations, changes in exchange currency rates and changes in income wealth.
It is affected by technological innovations, changes in the quality and size of labor, an increase in production costs, an increase in wages, changes in subsidies, taxes and inflation.
 ComponentsIt is driven by capital goods, all consumer goods, imports, exports and government spending programs.
It is driven by savings and consumption. 


Class 12 Commerce Economics Extra Questions