Important Questions of Determination of Income and Employment Class 12 Macroeconomics Chapter 4
Question 1.
Why does consumption curve not start from the origin? (March 2018)
Answer:
Consumption curve does not start from origin due to autonomous consumption which is minimum level of consumption even when income is zero.
Question 2.
Define Aggregate Supply. (April Re-exam 2018, Delhi 2014)
Or
What is Aggregate Supply in macroeconomics? (Delhi 2015)
Or
Give the meaning of Aggregate Supply. (Foreign 2014)
Answer:
Aggregate Supply is the money value of the final goods and services or national product produced in an economy during an accounting year. It is equal to income generated.
Question 3.
Define Marginal Propensity to Consume. (All India 2017; Delhi 2014)
Answer:
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume. Symbolically,
Marginal Propensity to Consume (MPC)
=
Question 4.
What is Aggregate Demand in macroeconomics? (All India 2015)
Or
Give the meaning of Aggregate Demand. (Delhi 2012,2010)
Answer:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.
Question 5.
Name any two components of ‘Aggregate Demand’. (Foreign 2015)
Answer:
Two components of Aggregate Demand are
(i) Household consumption expenditure
(ii) Net exports
Question 6.
What is excess of exports of goods over the imports of goods called? Foreign 2014
Answer:
It is referred to as ‘net exports’.
Question 7.
Define investment. (Delhi 2014)
Answer:
Investments are additions made to the present stock of capital. They lead to an increase in capital assets, i.e. capital formation.
Question 8.
Define Average Propensity to Consume. (Delhi (C) 2012)
Answer:
The ratio between the consumption expenditure and income is known as Average Propensity to Consume. Symbolically,
=
Question 9.
How is the value of Marginal Propensity to Save calculated? (Delhi (C) 2012)
Or
Give the meaning of Marginal Propensity to Save. (All India 2010)
Or
Define Marginal Propensity to Save. (All India 2010)
Answer:
Marginal Propensity to Save is the ratio of change in saving with the change in income. Symbolically,
Marginal Propensity to Save (MPS)
=
Question 10.
The consumption function of an economy is : C = 40 + 0.8 Y (amount ₹ in crores). Determine that level of income where Average Propensity to Consume will be one. (All India 2019)
Answer:
APC is equal to one when Consumption (C) is equal to Income (Y), i.e. C = Y
Therefore, Y = 40 + 0.8Y
Y – 0.8Y = 40
0. 2 Y = 40
Y =
= 200
So, when income is 200, then APC will be one.
Question 11.
Which of the two, Average Propensity to Consume or Average Propensity to Save, can be negative and why? (All India 2019)
Answer:
Out of Average Propensity to Consume (APC) and Average Propensity to Save (APS), APC can never be zero as consumption is always positive. APS can be zero or negative as it depends upon saving which is zero when income is equal to consumption and negative when income is less than consumption.
Question 12.
Distinguish between Marginal Propensity to Consume and Average Propensity to Consume. Give a numerical example. (Delhi 2016)
Answer:
Differences between Marginal Propensity to Consume and Average Propensity to Consume are (any 2)
The numerical example given below will help to understand the computation of MPC and APC
Income (Y) | Consumption (C) | APC (C/Y) | ΔC | ΔY | MPC (ΔC/ΔY) |
0 | 0 | – | – | – | – |
200 | 200 | 1.75 | 50 | 200 | 0.25 |
400 | 400 | 1 | 50 | 200 | 0.25 |
Question 13.
Calculate consumption expenditure in the economy whose equilibrium level of income is ₹ 20,000, autonomous consumption is ₹ 500 and Marginal Propensity to Save is 0.5. (All India 2016)
Answer:
Given, Income (Y) = ₹ 20,000; Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS ) = 0.5; Consumption Expenditure (C) = ?
We know that,
MPC = 1 – MPS = 1 – 0.5 = 0.5 C
C = C̅ + MPC(Y)
= 500 + (0.5)20,000
∴ C = 500 + 101)00
= ₹ 10,500
Question 14.
From the following data calculate Marginal Propensity to Consume.
Equilibrium level of income = ₹ 2,000
Autonomous consumption = ₹ 200 Investment expenditure = ₹ 800 (Delhi (C) 2016)
Answer:
Given Income (Y) = ₹ 2,000; Autonomous Consumption (C̅) = ₹ 200;
Investment (I) = ₹ 800
We know that. Consumption Expenditure (C) = C̅ + (MPC)Y and Y = C + I
∴ Y = C̅ + (MPC )Y + I
2,000 = 200 + (MPC) 2000 + 800
∴ MPC =
Question 15.
What is Aggregate Demand? State its components. (All India 2016)
Answer:
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.
Following are the components of Aggregate Demand
- Household consumption expenditure
- Private investment expenditure
- Government expenditure
- Net exports
Question 16.
Which of the following cannot have a negative value? Give reasons.
(i) Average Propensity to Save
(ii) Marginal Propensity to Save (All India (C) 2015)
Answer:
(i) Average Propensity to Save (APS) represents the ratio between savings and income. When consumption expenditure is more than indome, then it gives rise to negative savings or dis-savings. In this case, APS will be negative.
(ii) Marginal Propensity to Save (MPS) represents the ratio between change in savings and change in income. As such, its value cannot be negative. It’s value ranges between 0 and 1. If the whole of income is spend on consumption, then MPS is zero. On the other hand, if whole of income is saved then MPS is one.
Question 17.
Give the meaning of Average Propensity to Save. What is its relation with Average Propensity to Consume? (Delhi (C) 2014)
Answer:
The ratio between total savings and total income in an economy at a given level of income is termed as Average Propensity to Save. Symbolically,
Average Propensity to Save (APS) =
Average Propensity to Consume (APC) is the ratio of the total consumption to total income and Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC
Question 18.
Explain the distinction between ‘Autonomous Investment’ and ‘Induced investment’. (Delhi (C) 2013)
Answer:
Differences between Autonomous Investment and Induced Investment are
Basis | Autonomous Investment | Induced Investment |
Motive | It is done to promote social welfare. | It is driven by profit motive. |
Sector | It is generally undertaken by the government sector. | It is generally done by private sector. |
Income Elasticity | It is not affected by the changes in income level. | It is affected by the changes in the income level. |
Question 19.
Find consumption expenditure from the following.
Autonomous Consumption = ₹ 100 Marginal Propensity to Consume = 0.70 National Income = ₹ 1,000 (Delhi 2012)
Answer:
Here, Autonomous Consumption
(C̅) = ₹ 100,
MPC (b) = 0.70 and Income (Y) = ₹ 1,000
So, Consumption Expenditure (C) = C̅ + bY
= 100 + 0.7 × 1,000
= 100 + 700 = ₹ 800
Question 20.
Find consumption expenditure from the following.
National Income = ₹ 5,000 Autonomous Consumption = ₹ 1,000 Marginal Propensity to Consume = 0.8 (All India 2012)
Answer:
Here, Y = ₹ 5,000, C̅ = ₹ 1,000, MPC or b = 0.8
So, Consumption Expenditure (C) = C̅ + bY
= 1000 + [0.8 × 5,000]
= 1,000 + 4,000 = ₹ 5,000
Question 21.
Outline the steps taken in deriving consumption curve from the saving curve. Use diagram. (Delhi 2012)
Or
Given saving curve, derive the consumption curve and state the steps in doing so. Use diagram. (All India 2016)
Answer:
Various steps to be taken for derivation of consumption curve from saving curve are
(i) At zero level of income, savings is negative (i.e. dissavings) represented by OS. This is equal to the autonomous consumption level equal to OC̅.
(ii) We draw a 45° line passing through the origin which shows that C = Y. This is the income line.
(iii) Now, we draw a vertical line from the point E, where saving is zero. At zero level of saving, C = Y, so B is the break-event point.
(iv) The consumption curve is derived by joining C̅ and B and extending it forward.
Question 22.
Explain the relationship between Average Propensity to Consume and Average Propensity to Save. Which of these can have a negative value and when? (All India 2011)
Answer:
Relationship between average propensity to Consume and Average Propensity to Save:
The ratio between total savings and total income in an economy at a given level of income is termed as Average Propensity to Save. Symbolically,
Average Propensity to Save (APS) =
Average Propensity to Consume (APC) is the ratio of the total consumption to total income and Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC
Average Propensity to Save can have negative value, when the amount of consumption expenditure is more than the income.
Question 23.
Given that National Income is ₹ 80 crore and consumption expenditure is ₹ 64 crore, find out Average Propensity to Save. When income rises to ₹ 100 crore and consumption expenditure to ₹ 78 crore, what will be the Average Propensity to Consume and Marginal Propensity to Consume? (Delhi 2011)
Answer:
Here, in first condition, Income (Y) = ₹ 80 crore
Consumption (C) = ₹ 64 crore Hence, Savings (S) = Y – C = 80 – 64 = ₹ 16 crore
Now, Average Propensity to Save (APS) =
=
Again, when income and consumption expenditure rises.
New Income (Y) = ₹ 100 crore; Change in Income (ΔY) = ₹ 20 crore (100 – 80)
New Consumption (C) = ₹ 78 crore; Change in Consumption (ΔC) = ₹ 14 crore (78 – 64)
So, Average Propensity to Consume (APC) =
=
And, Marginal Propensity to Consume (MPC)
= 0.70
Question 24.
If National Income is ₹ 90 crore and consumption expenditure is ₹ 81 crore, find out Average Propensity to Save. When income rises to ₹ 100 crore and consumption expenditure to ₹ 88 crore, what will be the Marginal Propensity to Consume and Marginal Propensity to Save? (Delhi 2011)
Answer:
Here, in first condition. Income (Y) = ₹ 90 crore and Consumption (C) = ₹ 81 crore
Average Propensity to Save (APS) =
=
Again, when the income and consumption expenditure rises,
New Income (Y) = ₹ 100 crore;
Change in Income (ΔY) = ₹ 10 crore (100 – 90)
New Consumption (C) = ₹ 88 crore; Change in Consumption (ΔC) = ₹ 7 crore (88 – 81)
So, Marginal Propensity to Consume (MPC)
=
And, Marginal Propensity to Save (MPS) = 1 – MPC = 1 – 0.7 = 0.3
Question 25.
In an economy, the Marginal Propensity to Consume is 0.75. Investment expenditure in the economy increases by ₹ 75 crore. Calculate the total increase in National Income. (All India 2011)
Answer:
Here, Marginal Propensity to Consume (MPC) = 0.75, and Change in Investment = ₹ 75 crore We know that change in investment equals to change in savings,
Change in Saving (ΔS) = ₹ 75 crore
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.75 = 0.25
Or 0.25 =
Or ΔY =
Or Total increase in National Income (ΔY)
= ₹ 300 crore
Question 26.
Explain the meaning of Marginal Propensity to consume. What is its relationship with Marginal Propensity to Save? (Delhi (C) 2011)
Answer:
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.
Symbolically,
Marginal Propensity to Consume (MPC)
Relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is explained below
As we know that. Change in Income (ΔY) = Change in Consumption (ΔC) + Change in Saving (ΔS)
So,
(on dividing throughout by ΔY)
Hence, 1 = MPC + MPS
Or MPS = 1 – MPC
And MPC = 1 – MPS
Question 27.
In an economy, total savings are ₹ 2,000 crore and the ratio of Average Propensity to Save and Average Propensity to Consu’me is 2 : 7. Calculate the level of income in an economy. (All India 2010)
Answer:
Here, Total Saving (S) = ₹ 2,000 crore
Or APS =
=
Also, S =
Or 2,000 =
Or Y =
Or National Income = ₹ 9,000 crore
Question 28.
In an economy, the consumption expenditure is ₹ 8,750 crore and the ratio of Average Propensity to Consume and Average Propensity to Save is 7 : 1. Calculate the level of income in the economy. (All India 2010)
Answer:
Here, Consumption Expenditure (C)
= ₹ 8,750 crore
So, ratio of consumption to income (APC)
=
Also, C =
[Where, Income (Y) = Consumption (C) + Saving (S)]
Or Y =
National Income = ₹ 10,000 crore
Question 29.
In an economy, the ratio of Average Propensity to Consume and Average Propensity to Save is 5 : 3. The level of income is ₹ 6,000. How much are the savings? Calculate. (Delhi (C) 2010)
Answer:
Here
and Income (Y) = ₹ 60,000
Now, as
So, ratio of consumption to income (APC) =
[As, Income (Y) = Consumption (C) + Saving (S)]
So, C =
= ₹ 3,750
Hence, Saving (S) = Y – C = 6,000 – 3,750 = ₹ 2,250
Question 30.
State and discuss the components of Aggregate Demand in two sector economy. (Delhi 2019)
Answer:
A two sector economy comprises of households and firms components of Aggregate Demand (AD) in such an economy are as follows:
(i) Consumption Expenditure (C) It refers to the total expenditure incurred by all the household in an econpmy on final goods and services in order to satisfy their wants.
(ii) Investment (I) It refers to planned investment expenditure by the firms. It includes addition to stock of physical capital like machines, equipments etc and change in inventory.
Question 31.
What is mean by Aggregate Demand? State its components. March 2018
Answer:
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy.
Following are the components of Aggregate Demand
- Household consumption expenditure
- Private investment expenditure
- Government expenditure
- Net exports
Question 32.
What is Ex-ante consumption? Distinguish between Autonomous Consumption and Induced Consumption. (April re-exam 2018)
Answer:
Ex-ante consumption refers to planned (desired) consumption expenditure of households (in two sector economy). In other words, it is one which is expressed in terms of what the people had planned to consume in the same period.
Differences between Autonomous and Induced Consumption are
Basis | Autonomous Consumption | Induced Consumption |
Meaning | Autonomous consumption is the minimum level of consumption required for sustenance. | Iduced consumption is that part of consumption that varies directly with disposable income. With increase in income, autonomous consumption also increases and vice-versa. |
Representation in Consumption Equation | In a consumption equation, autonomous consumption is represented by C̅. | In a consumption equation, induced consumption is represented as by, where b is the MPC and Y is the income. |
Zero Level | It is not zero at zero income. | It is zero at zero income. |
Question 33.
The value of Marginal Propensity to Consume is 0.6 and initial income in the economy is ₹ 100 crore. Prepare a schedule showing Income, Consumption and Saving. Also show the equilibrium level of income by assuming Autonomous Investment of ₹ 80 crore. (March 2018)
Answer:
Marginal Propensity to Consume (MPC) = 0.6,
Initial Income (Y) = ₹ 100 crore,
Assuming autonomous Consumption (C̅) = ₹ 200 crore
Schedule showing Income, Consumption and Saving
Income (y) | Consumption (c) | Saving (s) | Change in Income (DX) | Change in Consumption (DC) | MPC ( |
100 | 260 | -160 | – | – | – |
200 | 320 | -120 | 100 | 60 | 0.6 |
300 | 380 | -40 | 100 | 60 | 0.6 |
400 | 440 | -40 | 100 | 60 | 0.6 |
500 | 550 | 0 | 100 | 60 | 0.6 |
600 | 560 | 40 | 100 | 60 | 0.6 |
At equilibrium levels, Y = C + I
Or Y = C̅ + bY + I
On substituting, Y = 200 + 0.6 Y + 80
Y – 0.6 Y = 280
0.4Y = 280
Y =
Question 34.
An economy is in equilibrium. From the following data, calculate the Marginal Propensity to Save. (All India 2017)
(a) Income = ₹ 10,000
(b) Autonomous Consumption = ₹ 500
(c) Consumption Expenditure = ₹ 8,000
Answer:
We know that,
Consumption Expenditure = C̅ + bY,
Where, C̅ = Autonomous Consumption,
b = Marginal Propensity to Consume and Y = Income
So, on substituting the given variables, we get,
8,0 = 500 + b x 10,000
Or 8,000 – 500 = b x 10000
Or b =
Marginal Propensity to Consume = 0.75.
We also know that,
MPC + MPS = 1
Where, MPC = Marginal Propensity to Consume and MPS = Marginal Propensity to Save
On substituting MPC = 0.75, we get,
0.75 + MPS = 1
Or MPS = 1 – 0.75 = 0.25, i.e.
Marginal Propensity to Save = 0.25
Question 35.
Complete the following table.
Income | Marginal Propensity to Save | Average Propensity to Save | Consumption Expenditure |
200 | – | 0.4 | 120 |
400 | – | – | 220 |
– | – | 0.48 | 260 |
Answer:
Income(Y) | Consumption Expenditure(C) | Savings (S) | Average Propensity to Save | MPS |
200 | 120 | 80 | 0.4 | – |
400 | 220 | 180 | 0.45 | 0.5 |
500 | 260 | 240 | 0.48 | 0.6 |
Formulae used:
S = Y – C
MPS =
Question 36.
If National Income is ₹ 50 crore and saving ?5 crore, find out Average Propensity to Consume. When income rises to ₹ 60 crore and saving to ₹ 9 crore, what will be the Average Propensity to Consume and the Marginal Propensity to Save? (Delhi 2011)
Answer:
National Income (Y) = ₹ 50 crore
Saving (S) = ₹ 5 crore
∴ Consumption (C) = Y – S
= 50 – 5 = ₹ 45 crore
∴ APC =
After change,
Income (Y1) = ₹ 60 crore
Change in Income (ΔY) = 60 – 50 = 10
Consumption (C1) = 60 – 9 = 51
Change in Saving (ΔS) = 9 – 5 = 4
∴ APC =
And MPS =
Question 37.
Given a consumption curve, outline the steps required to be taken in deriving a saving curve from it. Use diagram. (All India 2017)
Or
Given consumption curve, derive saving curve and state the steps taken in the process of derivation. Use diagram. (Delhi 2016)
Or
Outline the steps required to be taken in deriving saving curve from the given consumption curve. Use diagram. (Delhi 2014)
Answer:
Steps taken for derivation of saving curve are
(i) At zero level of Income (Y), the Autonomous Consumption is OC̅. If we take the vertical distance between the Consumption Curve, CC̅ and income line at zero level of income, then
(ii) The consumption curve intersects income line at point B. It is the break-even point where Consumption (C) is equal to income (C = Y). At this point. Saving (S) will be zero as all the income is consumed. Hence, the saving curve will intersect the A-axis (at point E) at this income level.
(iii) The consumption is less than income beyond point E. It means the excess income after consumption is saved and hence, the saving curve moves towards positive direction above A-axis with the increase in the level of income.
Question 38.
Explain the consumption function and saving function. (Foreign 2014)
Answer:
Consumption function The functional relationship between the consumption expenditure and the income is known as consumption function. Mathematically it is expressed as,
C = f (Y), which is read as ‘consumption is a function of income’.
Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption Expenditure
C̅ = Autonomous consumption, when income is zero
b = Marginal Propensity to Consume
Y = Income
Saving function The functional relationship between the savings and income is known as saving function. Mathematically, it is expressed as S = f (Y), which is read as ‘Saving is a function of income’. Saving function, as an algebraic expression, can be written as S = –
S = Savings
–
s = Marginal Propensity to save
Y = Income
Question 39.
Complete the following table. (Delhi 2013)
Income (Y) | Saving (S) | Average Propensity to Consume (APC) | Marginal Propensity to Consume (MPC) |
0 | -40 | – | – |
50 | -20 | – | – |
100 | 0 | – | 0.6 |
150 | 30 | 0.8 | – |
200 | 50 | – | – |
Answer:
Income (Y) | Saving (S) | Consumption (C) | Average Propensity to Consume (APC) | Marginal Propensity to Consume (MPC) |
0 | -40 | 40 | ∞ | – |
50 | -20 | 70 | 1.4 | 0.6 |
100 | 0 | 100 | 1 | 0.6 |
150 | 30 | 120 | 0.8 | 0.4 |
200 | 50 | 150 | 0.75 | 0.6 |
Formulae used:
C = Y – S; APC= C/Y, MPC =
Question 40.
Complete the following table. (Delhi 2013)
Income (Y) | Consumption Expenditure (C) | Marginal Propensity to Save (MPS) | Average Propensity to save (APS) |
0 | 80 | – | – |
100 | 140 | 0.4 | – |
200 | – | – | 0 |
– | 240 | – | 0.20 |
– | 260 | 0.8 | 0.35 |
Answer:
Income (Y) (C + S) | Consumption Expenditure (C) (Y – S) | Saving (S) (Y – C) | Change in Saving (ΔS) | Change in Income (ΔY) | Marginal Propensity to Save (MPS) | Average Propensity to save (APS) |
0 | 80 | -80 | – | – | – | – |
100 | 140 | -40 | 40 | 100 | 0.4 | 0.4 |
200 | 200 | 0 | 46 | 100 | 0.4 | 0 |
300 | 240 | 60 | 60 | 100 | 0.6 | 0.20 |
400 | 260 | 140 | 80 | 100 | 0.8 | 0.35 |
Formulae used
C = Y – S, S = Y – C, MPS =
Question 41.
Complete the following table. (Delhi 2013)
Consumption expenditure (₹) | Savings (₹) | Income (₹) | Marginal Propensity to Consume |
100 | 50 | 150 | – |
175 | 75 | – | – |
250 | 100 | – | – |
325 | 125 | – | – |
Answer:
Consumption expenditure (₹) | Savings (₹) | Income (₹) | Marginal Propensity to Consume |
100 | 50 | 150 | – |
175 | 75 | 250 | 0.75 |
250 | 100 | 350 | 0.75 |
325 | 125 | 450 | 0.75 |
Formulae used:
Y = C + S, MPC =
Question 41.
Explain consumption function, with the help of a schedule and diagram. (All India 2011)
Answer:
The functional relationship between the consumption expenditure and the income is known as consumption function. Symbolically,
C = f(Y), Which is read as, ‘Consumption is a function of income’.
Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption expenditure
C̅ = Autonomous consumption at zero level of income
b = Marginal Propensity to Consume
Y = Income
Let us understand it with the help of a schedule and diagram
Consumption (C) | Income (Y) | Marginal Propensity to Consume (MPC) = | Change in Consumption (ΔC) | Change in Income (ΔY) |
100 | 0 | – | – | – |
170 | 100 | 0.7 | 70 | 100 |
240 | 200 | 0.7 | 70 | 100 |
310 | 300 | 0.7 | 70 | 100 |
380 | 400 | 0.7 | 70 | 100 |
450 | 500 | 0.7 | 70 | 100 |
The point B represents the break-even point, where the consumption expenditure equals the income. To the left of point B, consumption is greater than income and to the right of point B, consumption is less than income.
Question 42.
If the value of Marginal Propensity to Save is 0.4, what will be the value of investment multiplier? (All India 2012)
Answer:
Investment Multiplier (K) =
=
Question 43.
What can be the minimum value of investment multiplier? (Delhi (C) 2012)
Answer:
The minimum value of investment multiplier is 1.
Question 44.
Give the meaning of ex-ante savings. (Delhi 2010)
Answer:
The planned or desired savings by the people during an accounting year is termed as ex-ante saving.
Question 45.
What is Ex-ante Aggregate Demand? (All India 2010)
Answer:
The planned expenditure on the purchase of goods and services in an economy during a period of an accounting year, is termed as Ex-ante Aggregate Demand.
Question 46.
When will there be equilibrium level of National Income? (All India 2010)
Answer:
When Aggregate Demand (AD) is equal to Aggregate Supply (AS) in an economy, at full employment level, then it is termed as the equilibrium level of National Income.
Question 47.
Calculate change in final income, if Marginal Propensity to Consume (MPC) is 0.8 and change in initial investment is ₹ 1,000 crore. (All India 2019)
Answer:
MPC (b) = 0.8
Change in Investment (ΔI) = ₹ 1,000 crore
Investment Multiplier
(K) =
⇒ 5 =
ΔY = ₹ 5,000 crore
Question 48.
State the meaning of the following. (All India 2019)
(a) Ex-ante savings
(b) Full employment
(c) Autonomous consumption
Answer:
(a) The planned expenditure on the purchase of goods and services in an economy during a period of an accounting year, is termed as Ex-ante Aggregate Demand.
(b) Full employment It refers to the state where all those who are willing and able to work at a particular wage rate are employed.
(c) Autonomous consumption It refers to the consumption at zero level of income, i.e. it is independent of level of income. This is the basic amount required for consumption at all levels of income.
Question 49.
Estimate the change in final income if Marginal Propensity to Consume (MPC) is 0.75 and change in initial investment is ₹ 2,000 crore. (All India 2019)
Answer:
Change in Final Income (ΔY) = ?
MPC = 0.75
Change in Initial Investment (ΔI) = ₹ 2,000 crore
Investment Multiplier (K) =
=
Also,
4 =
AY = ₹ 8,000 crore
Question 50.
If in an economy
Change in initial investment (ΔI) = ₹ 500 crore
Marginal Propensity to Save (MPS) = 0.2 Find the values of the following
(a) Investment Multiplier (K)
(b) Change in final income (ΔY) (Delhi 2019)
Answer:
Investment Multiplier (K) = 1/ MPS = 1/0.2 = 5
5 = ΔY/500
ΔY = ₹ 2,500 crore
Question 51.
Define Multiplier. What is the relation between Marginal Propensity to Consume and Multiplier? Calculate the Marginal Propensity to Consume if the value of Multiplier is 4. (March 2018)
Answer:
Investment multiplier is the ratio between change in income and the corresponding change in investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier
There is direct or positive relationship between Marginal Propensity to Consume (MPC) and Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) =
e.g. If MPC = 0.5, then K =
When MPC increase to 0.75, then
K =
So, we observe that as MPC rises, K also rises.
We know that, K =
4 =
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC =
Question 52.
Define Investment Multiplier. How is it related to Marginal Propensity to Consume? (April Re-Exam 2018)
Answer:
Investment multiplier is the ratio between change in income and the corresponding change in investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier
There is direct or positive relationship between Marginal Propensity to Consume (MPC) and Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) =
e.g. If MPC = 0.5, then K =
When MPC increase to 0.75, then
K =
So, we observe that as MPC rises, K also rises.
We know that, K =
4 =
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC =
Question 53.
In an economy investment is increased by ₹ 300 crore. If Marginal Propensity to Consume is 2/3, calculate increase in National Income. (Delhi 2016)
Answer:
Given,
Marginal Propensity to Consume (MPC)
=
Change in Investment Expenditure (ΔI)
= ₹ 300 crore
We know that,
Investment Multiplier (K) =
=
Also,
Investment Multiplier (K)
So 3 =
ΔY = 900
National Income increases by ₹ 900 crore.
Question 54.
Suppose Marginal Propensity to Consume is 0.8. How much increase in investment is required to increase National Income by ₹ 2,000 crore? Calculate. (Delhi 2016)
Answer:
Given, Marginal Propensity to Consume (MPC)
= 0.8
Change in National Income (AY) = ₹ 2,000 crore
We know that,
Investment Multiplier (K) =
Also, Investment Multiplier (K)
So 5 =
i.e. investment should be increased by ₹ 400 crore, in order to increase income by ₹ 2,000 crore.
Question 55.
In an economy an increase in investment by ₹ 100 crore led to increase in National Income by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi 2016)
Answer:
Given,
Increase in Investment (ΔI) = ₹ 100 crore
Increase in Income (ΔY) = ₹ 1,000 crore
We know that,
Investment Multiplier (K) =
Also, K =
So, 10 =
Or 10 – 10 MPC = 1,
Or – 10MPC = 1 – 10 Or MPC =
i.e. Marginal Propensity to Consume = 0.9
Question 56.
An economy is in equilibrium. Calculate Marginal Propensity to Consume National Income = ₹ 1,000,
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2016)
Answer:
Given, National Income (Y) = ₹ 1,000,
Autonomous Consumption Expenditure (C̅) = ₹ 200,
and Investment Expenditure (I)= ₹ 100,
Marginal Propensity to Consume (MPC/b) = ₹ We know that at the equilibrium level,
Savings = Investment,
So, Income (Y) = Consumption Expenditure (C) + Investment (I)
Also, Consumption Expenditure (C) = C̅ + bY So, it follows that,
Y = C̅ + bY + I
On substituting the given variables, we get
1000 = 200 + b × 1,000 + 100
Or 1,000 = 300 +1000 b.
Or 700 = 1,000 b,
Or b =
Or Marginal Propensity to Consume (MPC) = 0.7
Question 57.
From the following data calculate investment expenditure. (All India 2016)
Marginal Propensity to Save = 0.2
Equilibrium level of Income = ₹ 22,500
Autoriomous Consumption = ₹ 500
Answer:
Given, MPS = 0.2,
Y = ₹ 22,500, C̅ = ₹ 500, I = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y = C + I
and C = C̅ + (MPC)Y
∴ Y = C̅ + (MPC)Y + I
22,500 = 500 + (0.8)22,500 + I
I = 22,500 – 500 – 18000 = ₹ 4,000
Question 58.
What is Investment Multiplier? How is its value determined? What can be its minimum and maximum values? (Delhi (C) 2016)
Or
Explain the meaning of investment multiplier. What can be its minimum and maximum value? (Delhi (C) 2014)
Answer:
It is also equal to
MPC is Marginal Propensity to Consume So, the value of Multiplier depends on the value of MPC.
Since, 0 < MPC < 1, therefore, if
MPC = 0, then K = 1, and if MPC = 1, then K = ∞
So, it follows that the minimum value of investment multiplier can be 1 and maximum value can be infinity.
Question 59.
An economy is in equilibrium. Find investment expenditure.
National Income = ₹ 1,200
Autonomous Consumption Expenditure = ₹ 150
Marginal Propensity to Consume = 0.8 (All India 2016)
Answer:
Given, National Income (Y) = ₹ 1200
Autonomous Consumption Expenditure (C̅) = ₹ 150,
Marginal Propensity to Consume (MPC/b) = 0.8 We know that, Y = C̅ + bY + I, Where I is the Total Investments in the economy.
On substituting the given variables, we get,
1200 = 150 + 0.8 × 1200 + 1, Or 1200 = 1210 + I Or
I = 1200 – 1210 = 90
Investment Expenditure = ₹ 90
Question 60.
In an economy investment expenditure is ₹ 1,000, autonomous consumption is ₹ 500 and Marginal Propensity to Save is 0.2. Calculate its equilibrium level of income. (All India 2016)
Answer:
Given, Investment (l)= ₹ 1,000,
Autonomous Consumption (C̅) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.2,
Income (Y) = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y = C + I and C = C̅ + (MPC)Y
∴ Y = C̅ +(MPC)Y + I
⇒ Y = 500 + (0.8)Y + 1,000
0.2 Y = 1,500 ⇒ Y = ₹ 7,500
Question 61.
From the following data calculate the equilibrium level of National Income Autonomous Consumption = ₹ 500 Marginal Propensity to Save = 0.2 Investment = ₹ 2.000 (Delhi (C) 2016)
Answer:
Given, Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS) = 0.2,
Investment (I) = ₹ 2,000,
We know that, MPC = 1 – MPS
= 1 – 0.2
∴ MPC = 0.8
Also, Consumption Expenditure (C) = C̅ + (MPC)Y
and at equilibrium level, Y = C + I
.’. Y = C̅ + (MPC)Y + I
Y = 500 + 0.8Y + 2,000
Y = 2,500 + 0.8Y
0.2 Y = 2,500
Y = ₹ 12,500
∴ Equilibrium level of National Income = ₹ 12,500
Question 62.
Calculate investment expenditure in the economy from the following data. Equilibrium Level of Income = ₹ 10,000 Autonomous Consumption = ₹ 500 Marginal Propensity to Consume 0.75 (Delhi (C) 2016)
Answer:
Given Y = ₹ 10,000; C̅ = ₹ 500; MPC = 0.75,
We know that, C = C̅ + (MPC )Y and Y = C + I
∴ Y = C̅ + (MPC)Y + I
10,000 = 500+ (0.75) × 10,000 + I
I = 10,000 – 500 – 7,500
∴ I = ₹ 2,000
Question 63.
In an economy 20 % of increased income is saved. How much will be the increase in income if investment increase by ₹ 10,060? Calculate. (All India (C) 2015)
Answer:
Marginal Propensity to Save (MPS)
= 20% =
Investment Multiplier (K) =
⇒ K =
K =
∴ ΔY = 50,000
Therefore, increase in investment by ₹ 10,000, increases the income by ₹ 50,000.
Question 64.
In an economy autonomous consumption is ₹ 500, Marginal Propensity to Save is 0.2 and investment expenditure is ₹ 2,000. Calculate its equilibrium level of income. (All India (C) 2015)
Answer:
C = ₹ 500, MPS = 0.2, I = ₹ 2,000
MPC = 1 – MPS = 1 – 0.2
∴ MPC = 0.8
Consumption function, C = C̅ + bY
[where, b = MPC]
= 500 + 0.8Y
At equilibrium level,
National Income (Y) = C + I
⇒ Y = 500 + 0.8Y + 2,000
⇒ Y – 0.8Y = 500 + 2,000
⇒ 0.2Y = 2,500
Y =
∴ Y = ₹ 12,500
Question 65.
What is the relationship between Marginal Propensity to Save and Investment Multiplier. (Delhi (C) 2015)
Answer:
There is an indirect or negative relationship between Marginal propensity to save (MPS) and multiplier (K). Higher the MPS, lower will be the value of Multiplier and vice-versa.
Multiplier (K) =
e.g. If MPS = 0.5, then K =
if MPS =0.75, then K =
So, we observe that when MPS rises to 0.75 from 0.5, the value of Multiplier falls from 2 to 1.33.
Question 66.
In an economy investment increases from 300 to 500. As a result of this, equilibrium level of income increases by ₹ 2,000, calculate the Marginal Propensity to Consume. (All India to 2015)
Answer:
Given,
Change in Income (ΔY) = ₹ 2,000
And, Change in Investment (ΔI) = 200(500 – 300)
∴ Investment Multiplier (K) =
Also, K =
MPC = Marginal Propensity to Consume
So, 10 =
Or 10 (1 – MPC) = 1
Or 10 – 10MPC = 1
Or 9 = 10 MPC
⇒ MPC = 9/10 = 0.9
Question 67.
S = -100 + 0.2 Y is the saving function in an economy. Investment expenditure is ₹ 5,000. Calculate the equilibrium level of income. (Delhi (C) 2015)
Answer:
At the equilibrium level of income,
Saving (S) = Investment (I)
∴ -100 + 0.2 Y = 5,000
0.2 Y = 5,000 + 100 = 5,100
Y =