Determination of Income and Employment Class 12 Important Questions and Answers Macroeconomics Chapter 4

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)
= changeinconsumption(ΔC)changeinincome(ΔY)

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,
= ConsumptionExpenditure(C)Income(Y)

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)
= changeinsaving(ΔS)changeinIncome(ΔY)

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 = 400.2
= 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 = 10002000 = 0.5

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) = Saving(S)Income(Y)

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,
YY = CY + SY
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) = Saving(S)Income(Y)

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) = SY
= 1680 = 0.20
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) = CY
= 78100 = 0.78
And, Marginal Propensity to Consume (MPC)
ΔCΔY = 1420
= 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) = SY = Y−CY
= 91−8190 = 0.10
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)
= ΔCΔY = 91−8190 = 0.70
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 = 75ΔY
Or ΔY = 750.25
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, ΔYΔY = ΔCΔY + ΔSΔY
(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 = Saving(S)Income(Y)
= 27+2 = 29
Also, S = 29 × Y
Or 2,000 = 29 × Y
Or Y = 92 × 2,000
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)
= 77+1 = 78
Also, C = 78 × Y
[Where, Income (Y) = Consumption (C) + Saving (S)]
Or Y = 87 × 8,750
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 APCAPS = 53
So, ratio of consumption to income (APC) = 55+3 = 58
[As, Income (Y) = Consumption (C) + Saving (S)]
So, C = 58 × 60,000
= ₹ 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 (DYDC)
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 = 2800.4 = ₹ 700 crore

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 = 750010000
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 = ΔSΔY; APS = SY

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 = CY = 4550 = 0.90
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 = C1Y1 = 5160 = 0.85
And MPS = ΔSΔY ⇒ 410 = 0.40

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 S¯¯¯ = -OC̅. Hence, the saving curve starts from the point S¯¯¯ on the negative Y-axis.

(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¯¯¯ + SY Where,
S = Savings
–S¯¯¯ = Savings at zero level of income (Dis-savings or borrowings)
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 = ΔCΔY

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 = ΔSΔY, APS = SY.

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 = ΔCΔY

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) = ΔCΔY	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) = 1MPS
= 10.4 = 104 = 2.5

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) = IncomeInvestment=11−0.8=10.2 = 5
⇒ 5 = ΔY1000
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) = 11−MPC
= 11−0.75=10.25 = 4
Also,

4 = ΔY2000
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) = 11−MPC
e.g. If MPC = 0.5, then K = 11−0.5=10.5 = 2
When MPC increase to 0.75, then
K = 11−0.75=10.25 = 4
So, we observe that as MPC rises, K also rises.
We know that, K = 11−MPC
4 = 11−MPC
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC = 34 = 0.75

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

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)
= 23 or 0.678
Change in Investment Expenditure (ΔI)
= ₹ 300 crore
We know that,
Investment Multiplier (K) = 11−MPC=11−0.67
= 10.33 = 3.03 ~ 3
Also,
Investment Multiplier (K)

So 3 = ΔY300
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) = 11−MPC=11−0.8 = 5
Also, Investment Multiplier (K)

So 5 = 2000ΔI Or ΔI = 400
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) = ΔYΔI=1,000100 = 10
Also, K = 11−MPC
So, 10 = 11−MPC Or 10 (1 – MPC) = 1,
Or 10 – 10 MPC = 1,
Or – 10MPC = 1 – 10 Or MPC = −9−10 = 0.9
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 = 7001000
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 11−MPC where
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% = 20100 = 0.2
Investment Multiplier (K) = 1 MPS
⇒ K = 10.2=102 = 5
K = ΔYΔI ⇒ 5 = ΔY10,000
∴ 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 = 2.5000.2=25.0002
∴ 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) = 1 MPS
e.g. If MPS = 0.5, then K = 10.5 = 2
if MPS =0.75, then K =10.75 = 1.33
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) = ΔYΔI=2,000200 = 10
Also, K = 1 1-MPC , Where
MPC = Marginal Propensity to Consume
So, 10 = 1 1-MPC
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 = 5,1000.2 = 25,500
∴ Income = ₹ 25,500

Question 68.
Calculate the equilibrium level of income in the economy. (Delhi (C) 2015)
C = 500 + (0.9) Y;
Investment expenditure = 3,000
Answer:
Given, C = 500 + (0.9 )Y.
Investment Expenditure (I) = ₹ 3,000
At equilibrium level, Y = C + I
⇒ Y = 500 + (0.9 )Y + 3,000
⇒ Y – (0.9 )Y = 3500 ⇒ (0.1)Y = 3,500
∴ Y = 3,5000.1 = ₹ 35,000

Question 69.
Calculate equilibrium level of income (Delhi (C) 2015)
Autonomous Consumption = ₹ 200
Marginal Propensity to Consume = 0.9
Investment Expenditure = ₹ 1,000
Answer:
Autonomous Consumption (C) = ₹ 200 [Given]
MPC = 0.9, I = ₹ 1,000
At equilibrium level, Y = C + I …….. (i)
And C = C̅ + bY [Where, b = MPC]
C = 200 + (0.9 )Y
Substituting the value of C in equation (i), we get,
Y = 200 + (0.9 )Y + 1,000
Y – (0.9 )Y = 1200 ⇒ (0.1)Y = 1200
∴ Y = 12000.1 = ₹ 12,000

Question 70.
Give the meaning of Investment Multiplier and Aggregate Supply. (Delhi (C) 2015)
Answer:
Aggregate supply Aggregate supply is the money value of the final goods and services produced in an economy during an accounting year. It is equal to income generated, symbolically,
Aggregate Supply (AS) = Consumption (C) + Savings (S)

Question 71.
The value of Marginal Propensity to Consume is double the value of Marginal Propensity to Save. Find the value of Multiplier. (All India 2014)
Answer:
We know that, MPC + MPS = 1 ……. (i)
Given MFC is double the value of MPS
⇒ MPC = 2 MPS
Substituting this in equation (i), we get,
2 MPS + MPS = 1
⇒ 3 MPS = 1
∴ MPS = 13
Now multiplier, K = 1MPS = 113 = 3
∴ Value of multiplier is 3.

Question 72.
Calculate ‘Investment’ from the following. Equilibrium Income = ₹ 500
Consumption Expenditure at zero income = ₹ 50
Marginal Propensity to Consume = 0.7 (Delhi (G) 2013)
Answer:
Here, Y = ₹ 500; MPC = 0.7; C̅ = ₹ 50
∴ C = C̅ + MPC × Y
Now, Y = C̅ + MPC × Y + I
⇒ 500 = 50 + 350 + I
⇒ 500 – 400 = I
Investment (I) = ₹ 100

Question 73.
Calculate Marginal Propensity to Consume from the following.
Equilibrium Income = ₹ 350
Consumption Expenditure at zero income = ₹ 20
Investment = ₹ 50 (Delhi (c) 2013)
Answer:
Given, Y = ₹ 350, Investment, I = 50, C = ₹ 20
Now, Y = C̅ + bY + I
350 = 20 + b(350) + 50
⇒ 350 = 70 + b(350)
350 – 70 = b(350)
⇒ 280 = b (350), b = 280350 = 0.8
∴ MPC = b = 0.8

Question 74.
Find ‘Investment’ from the following National Income = ₹ 500 Autonomous Consumption = ₹ 100 Marginal Propensity to Consume = 0.75 (Delhi 2012)
Answer:
National Income (Y) = ₹ 500;
Autonomous Consumption (C̅) = ₹ 100
MPC(b) = 0.75
Y = C̅ + bY + I (Investment)
Or Y – C̅ – bY = I
Or 500 – 100 – 0.75(500) = I
Or 400 – 375 = I
Or I = ₹ 25

Question 75.
In an economy 20 % fall in investment results in 40 % fall in income. Calculate the value of Marginal Propensity to Consume. (All India (C) 2012)
Answer:
Investment Multiplier (K) = ΔYΔI=0.40.2 = 2
Since, K = 1MPS
∴ MPS = 1K = 12
∴ MPC = 1 – MPS = 1 – 12=12 = 12 Or 0.5

Question 76.
Find National Income from the following. Autonomous consumption = ₹ 100 Marginal Propensity to Consume = 0.60 Investment = ₹ 200 (All India 2012)
Answer:
Here, C̅ = ₹ 100, MPC or b = 0.60, I = ₹ 200
At equilibrium level, I = S = ₹ 200
Now, we know that, Y = C + S
Or Y – S = C
Or Y – S = C̅ + bY because C = C̅ + bY
Or Y- 200 = 100 + 0.6 Y
Or Y – 0.6 Y = 100 + 200
Or 0.4 Y = 300
Hence, Y = 3000.4 = ₹ 750
Hence, National Income (Y) = ₹ 750

Question 77.
Find investment from the following. (All India 2012)
National Income = ₹ 600 Autonomous Consumption = ₹ 150
Marginal Propensity to Consume = 0.70
Answer:
Here, Y = ₹ 600, C = ₹ 150, MPC Or b = 0.70
We know that, Y = C + S
Or S = Y – C
Or S = 600 – [C̅ + bY]
Or S = 600 – [150+ (0.7 × 600)]
Or S = 600 – [150 + 420]
Or S = 600 – 570 Or S = ₹ 30
As, I = S = ₹ 30
Hence, Investment = ₹ 30

Question 79.
As a result of increase in investment by ₹ 60 crore, National Income rises to ₹ 240 crore. Calculate Marginal Propensity to Consume. (All India 2011)
Answer:
Here, Change in Investment (ΔI) = ₹ 60 crore,
Change in Income (ΔY) = ₹ 240 crore
Hence, Multiplier (K) = ΔYΔI=24060 = 4
Now K = 11−MPC, Where MPC is the marginal prosensity to consume
Or 4 = 11−MPC
Or 4 – 4 MPC = 1
Or 4 MPC = 4 – 1
Or MPC = 34
MPC = 0.75

Question 80.
In an economy, investment is increased by ₹ 2,000 crore. Calculate the change in total income, if Marginal Propensity to Save is 0.25. (All India 2010)
Answer:
Here, Change in Investment (ΔI)= ₹ 2,000 crore,
Marginal Propensity to Save (MPS) = 0.25
Now, Multiplier (K) = 1 MPS =10.25 = 4
Again, we know that,

Or 4 = ΔY2000
Or ΔY = 2,000 × 4
Change in Total Income (ΔY) = ₹ 8,000 crore

Question 81.
Find the value of multiplier given Marginal Propensity to Consume = 1 and Marginal Propensity to Save = 1. (All India 2010)
Answer:
(i) Here, Marginal Propensity to Consume (MPC) = 1
Hence, Multiplier (K) = 11−MPC=11−1 = ∞
So, Multiplier (K) = ∞ (Infinity)

(ii) Here, Marginal Propensity to Save (MPS) = 1
Now, K = 1MPS=11
Hence, Multiplier (K) = 1

Question 82.
In an economy, as a result of increase in investment by ₹ 100 crore, National Income rises by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi (C) 2010)
Answer:
Here, Change in Investment (ΔI) = ₹ 100 crore,
Change in Income (ΔY)= ₹ 1,000 crore
Now, Multiplier (K) = ΔYΔI = 1000100 = 10
Now, we know that, K = 11−MPC, Where MPC is the Marginal Propensity to Consume
Or 10 = 11−MPC
Or 10 – 10 MPC = 1
Or 10 MPC = 10 – 1
Or MPC = 910
Or MPC = 0.9

Question 83.
If Marginal Propensity to Save is one, what is the value of multiplier? What can you say about the change in National Income, given Change in Investment. (Delhi (C) 2010)
Answer:
Here, Marginal Propensity to Save (MPS) = 1
So, Multiplier (K) = 1MPS = 11 = 1
Now, suppose Change in Investment is given ₹ 100 crore
S0, K = Income(ΔY)Investment(ΔI)
Or 1 = ΔY100
Or Change in National Income (AY) = ₹ 100 crore,
So, it follows that the National Income will change in that quantum only with which investment changes.

Question 84.
An economy is in equilibrium. From the following data about an economy calculate autonomous consumption. (Delhi 2017)
Income = ₹ 5,000
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 800
Answer:
Given,
Income (Y) = ₹ 5,000,
Marginal Propensity to Save (MPS) = 0.2, and Investment Expenditure = 800 We know that,
MPS + MPC = 1,
On substituting MPS = 0.2, we get,
MPC (b) = 1-0.2 = 0.8
We also know that, at the point of equilibrium, Savings = Investment
∴ Savings = ₹ 800
Now, Income = Consumption + Savings
5000 = C̅ + b. 5,000 + 800,
Where, C̅ = Autonomous Consumption and b = MPC
∴ 5,000 – 800 = C̅ + 0.8 x 5,000
4200 = C̅ + 4,000
∴ C̅ = 4,200 – 4,000 = 200
∴ Autonomous consumption in the economy = ₹ 200

Question 85.
An economy is in equilibrium. Calculate the investment expenditure from the following: (All India 2015)
National Income = ₹ 800
Marginal Propensity to Save = 0.3
Autonomous Consumption = ₹ 100
Answer:
Given, National Income (Y) = ₹ 800
Marginal Propensity to Save (MPS) = 0.3
Marginal Propensity to Consume
(MPC or b ) = 1 – MPS = 1 – 0.3 = 0.7
Autonomous Consumption (C̅) = 100
As the economy is in equilibrium, therefore,
Saving = Investment
So, Income
(Y) = Consumption (C) + Investment (I)
Also, we know that, C = C̅ + bY
∴ Y = C̅ + bY + I …(i)
On substituting the variables in equation (i), we get,
800 = 100 + 0.7(800) + 1,700 = 560 + I
I = 140, i.e. Investment = ₹ 140

Question 86.
An economy is in equilibrium. Calculate the Marginal Propensity to Save from the following: (All India 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment = 120
Answer:
According to the question.
National Income (Y) = 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment (I) = ₹ 120
An economy is in equilibrium, therefore,
Saving = Investment
∴ Y = C̅ + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the variables in eq (i), we get,
1,000 = 100 + b (1,000) + 120
Or 1,000 – 220 = b (1,000)
Or b = 7801,000 b = 0.78 (b = MPC)
MPS = 1 – MPC
∴ MPS = 1 – 0.78 = 0.22

Question 87.
An economy is in equilibrium. Calculate the National Income from the following: (All India 2015)
Autonomous Consumption = 120
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 150
Answer:
Autonomous Consumption (C̅) = ₹ 120
Marginal Propensity to Save (MPS) = 0.2
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
MPC = 0.8
Investment expenditure (I) = ₹ 150
As the economy is in Equilibrium, therefore,
Saving = Investment
Y = C + I
Or Y = C̅ + bY + I, …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 120 + 0.8 Y + 150
Y – 0.8 Y = 270
0.2Y = 270
Y = 2700.2 = ₹ 1,350

Question 88.
An economy is in equilibrium. Calculate National Income from the following: (Delhi 2015)
Autonomous Consumption = ₹ 100
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 200
Answer:
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Save (MPS) = 0.2
Investment Expenditure (I) = ₹ 200
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
∴ MPC (b) = 0. 8
As the economy is in equilibrium, therefore, Saving = Investment
Y= C + I
Y = C̅ + bY + I ,..(i)
C = C̅ + bY
On substituting the variables in eq (i), we get
Y = 100 + 0.8Y + 200
Y – 0.8Y = 300
Y = 3000.2
Y= 1,500, i.e. National Income = ₹ 1,500

Question 89.
An economy is in equilibrium. Find ‘Autonomous Consumption’ from the following: (Delhi 2015)
National Income = ₹ 1,000
Marginal Propensity to Consume = 0.8
Investment Expenditure = ₹ 100
Answer:
Now, National Income (Y) = ₹ 1,000
Marginal Propensity to Consume (MPC/b) = 0.8
Investment Expenditure (I) = ₹ 100,
At equilibrium. Saving = Investment
∴ Y = C + I
Or Y = C̅ + bY + I ………(i)
C = C̅ + bY
On substituting the given variables in equation (i),
we get,
1,000 = C̅ + 0.8 (1000) + 100
1000 = C̅ + 800 + 100
C̅ = ₹ 100
i.,e. Autonomous Consumption = ₹ 100

Question 90.
An economy is in equilibrium. Find Marginal Propensity to Consume from the following: (Delhi 2015)
National Income = ₹ 2,000
Autonomous Consumption = ₹ 400
Investment Expenditure = ₹ 200
Answer:
Given, National Income (Y) = ₹ 2,000
Autonomous Consumption (C̅) = ₹ 400
Investment Expenditure (I) = ₹ 200
It is given in the question that the economy is in equilibrium,
hence Saving = Investment
∴ Y = C + I
Or Y = C̅ + bY + I ………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
2,000 = 400 + b (2,000) + 200
2,000 b = 1,400
b = 1,4002,000
b = 0.7, i.e. Marginal Propensity to Consume (MPC) = 0.7

Question 91.
An economy is in equilibrium. Calculate Marginal Propensity to Save from the following: (Foreign 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment Expenditure = ₹ 200
Answer:
It is given that.
National Income (Y) = ₹ 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment expenditure (I) = ₹ 200
At the equilibrium level, Saving = Investment
∴ Y = C + I (as S = I)
Or Y = C̅ + by + I ……… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
⇒ 1,000 = 100 + b (1000) + 200
or 1000 = 300 + 1,000 b
1,000 – 300 = 1000 b
Or 700/1000 = b = 0.7
Or Marginal Propensity to Consume (MPC) = 0.7
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.7
∴ MPS = 0.3

Question 92.
Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium.
National Income = ₹ 2,000
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2014)
Answer:
Given, Income (Y) = ₹ 2,000
Autonomus Consumption (C̅) = ₹ 200,
Inve-tment (I) = ₹ 100 We know, Y = C + I
Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given varibales in equation(i), we get,
2,000 = 200 + 2000 b + 100
b = 2000−3002,000
= 1,7002,000 = 0.85
Thus, Marginal Propensity to Consume (MPC) = 0.85

Question 93.
Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium.
National Income = ₹ 500
Marginal Propensity to Save = 0.30
Investment Expenditure = ₹ 100 (All India 2014)
Answer:
Given, National Income (Y) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.30, Investment (I) = ₹ 100
Marginal Propensity to Consume (b/MPC)
= 1 – MPS, 1 – 0.30 = 0.70
Also, Y = C + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
500 = C̅ + 0.70 × 500 + 100
500 = C̅ + 350 + 100
C̅ = 500 – 450 = 50
∴ Autonomous Consumption (C) = ₹ 50

Question 94.
Calculate investment expenditure from the following data about an economy which is in equilibrium. (Delhi 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.25
Autonomous Consumption Expenditure = ₹ 200
Answer: National Income (Y) = ₹ 1000
Marginal Propensity to Save (MPS) = 0.25, Autonomous
Consumption Expenditure (C) = ₹ 1000
Marginal Propensity to Consume (MPC/b) = I – MPS = 1 – 0.25 = 0.75
We know, Y = C + I, or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 200 + 0.75 × 1000 + I
1000 = 200 + 750 + I
1,000 = 950 + I
⇒ I = 1000 – 950 = 50
i. e. Investment = ₹ 50

Question 95.
Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium.
National Income = ₹ 1200 (Delhi 2014)
Marginal Propensity to Save = 0.20
Investment Expenditure = ₹ 100
Answer:
Given, Investment Expenditure (I) = ₹ 100, National Income (Y) = ₹ 1200,
Marginal Propensity to Save (MPS) = 0.20 Marginal Propensity to Consume (MPC/b)
= 1 – Marginal Propensity to Save (MPC) = 1 – 0.20 = 0.80
Also, Y = C + I, or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,200 = C̅ + 0.80 × 1200 + 100
1200 = C̅ + 960 + 100
= C̅ + 1,060
⇒ C̅ = 1200 – 1,060 = ₹ 140
Autonomous Consumption Expenditure (C̅) = ₹ 140

Question 96.
Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium. (Delhi 2014)
National Income = ₹ 1,500
Autonoumous Consumption Expenditure = ₹ 300
Investment Expenditure = ₹ 300
Answer:
National Income (Y) = ₹ 1,500,
Autonomous Consumption Expenditure (C̅) = ₹ 300,
Investment (I) = ₹ 300
Also, Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,500 = 300 + b (1,500) + 300
1,500 = 600 + 1,500 b
900 = 1,500 b or b = 900/1,500
b = 0.6
Therefore, Marginal Propensity to Consumer (MPC/b) = 0.6

Question 97.
Calculate ‘autonomous consumption expenditure’ from the following data about an economy which is in equilibrium.
National Income = ₹ 900
Marginal Propensity to Save = 0.10 Investment Expenditure = ₹ 80 (Foreign 2014)
Answer:
It is given that,
National Income (Y) = ₹ 900,
Marginal Propensity to Save (MPS) = 0.10, and Investment (I) = ₹ 80
Marginal Propensity to Consume (MPC/b)
= 1 – MPS = 1 – 0.10 = 0.90
At the equilibrium level. Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i).
we get,
900 = C̅ + 0.90 x 900 + 80
900 = C̅ + 810 + 80
900 = C̅ + 890
⇒ C̅ = 900 – 890 = 10
i.e. Autonomous Consumption (C̅) = ₹ 10

Question 98.
Calculate ‘investment expenditure’ from the following data about an economy which is in equilibrium.
National Income = ₹ 700 Marginal Propensity to Consume = 0.8 Autonomous Consumption Expenditure = ₹ 70 (Foreign 2014)
Answer:
It is given that,
National Income (Y) = ₹ 700,
Marginal Propensity to Consume (MPC/b) = 0.8 and
Autonomous Consumtion Expenditure (C̅) = ₹ 70
At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C= C̅ + bY
On substituting the given variables in equation (i), we get,
700 = 70 + 0.8 × 700 + I
700 = 70 + 560 + I
700 = 630 + I
⇒ I = 700 – 630 = 70
i.e. Investment Expenditure = ₹ 70

Question 99.
Calculate ‘Marginal Propensity to Consume’ from the following data about an economy which is in equilibrium. (Foreign 2014)
National Income = ₹ 800 Autonomous Consumption Expenditure = ₹ 100
Investment Expenditure = ₹ 100
Answer:
It is given that,
National Income (Y) = ₹ 800,
Autonomous Consumption Expenditure (C̅) = ₹ 100 and Investment Expenditure (I) = ₹ 100
As we know that at equilibrium level,
Saving = Investment,
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in eq (i), we get,
800 = 100 +b (800) + 100
800 = 200 + 800 b
600 = 800 b
Or b = 600/800 = 0.75
i.e. Marginal Propensity to Consume (MPC/b) = 0.75

Question 100.
In an economy the Marginal Propensity to Save is 0.4. National Income in the economy increase by ₹ 200 crore as a result of change in investment. Calculate the change in investment. (All India 2011)
Answer:

∴ ΔI = 2002.5 = 200 × 1025 = ₹ 80 crore

Question 101.
State whether the following statements are true or false. Give reasons for your answer.
(i) When Marginal Propensity to Consume is greater than Marginal Propensity to Save, the value of investment multiplier will be greater than 5.
(ii) The value of Marginal Propensity to Save can never be negative. (Delhi 2010)
Answer:
(i) No, the statement is false. This can be understood by an example. Suppose, the value of Marginal Propensity to Consume (MPC) = 0.6, hence. Marginal Propensity to Save (MPS) = 0.4 (as MPS = 1 -MPC) Here, MPC > MPS Now, Investment Multiplier
(K) = 11−MPC
= 11−0.6=10.4 = 2.5
So, K < 5 even if MPC > MPS.

(ii) Yes, the statement is true.

Question 102.
Giving reasons, state whether the following statements are true or false.
(i) Average Propensity to Save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity. Delhi 2010
Answer:
(i) No, the statement is false.

(ii) No, the statement is false.
We know that,
K = 11−MPC so even if the Marginal Propensity to Consume (MPC) will have its minimum value, i.e. 0, the investment multiplier will be I.
Similarly, when MPC = 1, the value of investment multiplier is infinity. Hence, value of investment multiplier varies between one and infinity.

Question 103.
Giving reasons, state whether the following statements are true or false.
(i) When Marginal Propensity to Consume is zero, the value of investment multiplier will also be zero.
(ii) Value of Average Propensity to Save can never be less than zero. (All India 2010)
Answer:
(i) No, the statement is false.
When Marginal Propensity to Consume (MPC) is zero, the value of investment multiplier will be 1 (not zero).
K = 11−MPC or K = 11−0=11 = 1

(ii) The statement is false.

Question 104.
Giving reasons state whether the following statements are true or false.
(i) If the ratio of Marginal Propensity to Consume and Marginal Propensity to Save is 4 : 1, the value of investment multiplier will be 4.
(ii) Sum of Average Propensity to Consume and Marginal Propensity to Consume is always equal to 1. (All India 2010)
Answer:
(i) No, the statement is false.
If the ratio of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is 4 : 1, then the value of investment multiplier is 5 and not 4.
MPC = 44+1=45 = 0.8
K = 11−0.8=10.2 = 5

(ii) No, the statement is false.
The sum of average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) is not necessarily 1.
Consider the following schedule

Income (Y)	Consumption (C)	Change in Income (ΔY)	Change in Consumption (ΔC)	Average Propersity to Consume C/Y	Marginal Propersity Consume (ΔC/ΔY)
1000	800	–	–	0.8	–
1500	1200	500	400	0.8	0.8

In the given schedule, APC = 0.8 and MPC = 0.8
And 0.8 + 0.8 ≠ 1
Therefore, the sum of APC and MPC is not 1,
i.e. APC + MPC ≠ 1

Question 105.
What is meant by the “Effective Demand Principle” in Keynesian theory of employment? Discuss using a schedule or a diagram. (All India 2019)
Answer:
According to the Keynesian theory, “Effective Demand Principle”, equilibrium happens to a point where Aggregate Demand is equal to Aggregate Supply at an under employment situation, which creates deficit demand or deflationary gap.

Deflationary gap refers to a situation, where AD = AS at less than full employment hereby creating unemployment due to under utilised capacity as shown in the diagram below

As shown in the diagram, AD (ex-ante) and AS (ex-ante) intersects at point E, which is the level of effective demand at full employment level. Now, if AD1 (ex-post) intersects AS(ex-ante) at E’ then it gives under full employment equilibrium due to shortage of effective demand. ‘Ea’ area in the above diagram shows the deficit demand which creates deflationary gap.

Question 106.
Assuming that increase in investment is ₹ 1,000 crore and Marginal Propensity to Consume is 0.9, explain the working of Multiplier. (Delhi 2017)
Answer:
Investment Multiplier or simply the multiplier is measured as a ratio between change in output or income and change in investment.
Symbolically, Investment multiplier (K)

Also, there is a direct relationship between Investment Multiplier and Marginal Propensity to Consume (MPC). Multiplier can also be estimated by using the following formula
K = 11−MPC
So, if MPC = 0.9, then K = 11−0.9=10.1 = 10
Now, if the investment increases by ₹ 1,000 crore, then increase in income can be computed by substituting the values in the following formula
K = ΔYΔI ⇒ 10 = ΔY1,000
⇒ Change in Income (A Y) = ₹ 10,000 crore
So, if investment increases by ₹ 1,000 crore and MPC = 0.9, then in such an instance, income will increase by ₹ 10,000 crore.

Question 107.
Assuming that increase in investment is ₹ 800 crore and Marginal Propensity to Consume is 0.8, explain the working of Multiplier. (All India 2017)
Answer:
Change in Income = ₹ 4,000 crore
Solve as Q. No. 2 on page 108 and 109.

Question 108.
Assuming that’s increase in investment is ₹ 900 crore and Marginal Propensity to Consume is 0.6, explain the working of Multiplier. (All India 2017)
Answer:
Increase in income = ₹ 2,250 crore
Solve as Q. No. 2 on page 108 and 109.

Question 109.
Calculate investment expenditure from the following data about an economy which is in equilibrium. (All India 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.20
Autonomous Consumption Expenditure = ₹ 100
Answer:
Given, National Income (Y) = ₹ 1,000,
Marginal Propensity to Save (MPS) = 0.20,
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Consume
(b/MPC) = I – MPS, I – 0.20 = 0.80
Y = C + I Or Y = C̅ + bY + I …………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 100 + 0.80 × 1000 + I
I = 1000 – 900 = 100
i.e. Investment = ₹ 100

Question 110.
On the basis of the following information about an economy calculate its equilibrium level of income. (Delhi (C) 2014)
Autonomous Consumption = ₹ 100
Marginal Propensity to Consume = 0.75
Investment = ₹ 5,000
Answer:
Income (Y) = Consumption (C) + Investment (I), since at the equilibrium level, Saving = Investment
Also, Consumption Expenditure (C) = C̅ + bY
Where, C̅ = Autonomous Consumption
b = Marginal Propensity to Consume
Y = Income
So, from the above two relations, we get,
Y = C̅ + bY + I
Y = 100 + 0.75Y + 5100
Y – 0.75Y = 5,100
0.25Y = 5100
Y = 5,1000.25 = 20,400
Therefore, equilibrium level of income = ₹ 20,400

Question 111.
From the following data about an economy, calculate its equilibrium level of income:
Marginal Propensity to Consume = 0.5
Autonomous Consumption = ₹ 300
Investment = ₹ 6,000 (Delhi (C) 2014)
Answer:
Autonomous Consumption (C̅) = ₹ 300; Investment (I) = ₹ 6,000 We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = 300 + 0.5Y + 6,000
⇒ Y – 0.5Y = 6300
0.5Y = 6,300
⇒ Y = 6,3000.5 = 12,600

Question 112.
(i) Explain the distinction between ex-ante measures and ex-post measures.
(ii) From the following data about an economy, calculate its equilibrium level of income
Autonomous consumption = ₹ 200 Marginal Propensity to Consume = 0.9 Investment = ₹ 1,000 (All India (C) 2014)
Answer:
(i)(a) Ex-ante measures These measures are planned or desired measures. Ex-ante measures are generally classified as:

Ex-ante savings These are desired savings. These represent the amount that households firms want to save during the period of an accounting year.
Ex-ante investments These are desired investments. These represent the amount that households/firms want to invest during the period of an accounting year.

(b) Ex-post measures These measures are actual or realised measures. Ex-post measures are generally classified as

Ex-post savings These represent the actual savings of firms or households during the period of an accounting year.
Ex-post investments These represent the actual investments of firms or households during the period of an accounting year.

(ii) Autonomous Consumption (C̅) = 1200
Marginal Propensity to Consume (MPC/b) = 0.9
Investment (I) = ₹ 1,000
We know that.
Income (Y) = C + I
And C = C̅ + b(Y)
⇒ Y = 200 + 0.9Y + 1,000
⇒ Y – 0.9 Y = 1,200 ⇒ 0.1 Y = 1,200
⇒ Y = 1,2000.1 = 1,200 × 101 = ₹ 12,000
∴ Equilibrium level of income will be ₹ 12,000.

Question 113.
From the following data about an economy, calculate its equilibrium level of income :
Marginal Propensity to Consume = 0.75
Autonomous consumption = ₹ 200 Investment = ₹ 6,000 (All India (C) 2014)
Answer:
Autonomous Consumption (C̅) = ₹ 200
Marginal Propensity to Consume (MPC/b) = 0.75
Investment (I) = ₹ 6,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ +b(Y) + I
⇒ Y = 200 + 0.75Y + 6,000
⇒ Y – 0.75Y = 6200
⇒ 0.25Y = 6200
⇒ Y = 6,2000.25 = 6,200 × 10025
= ₹ 24,800
∴ Equilibrium level of income will be ₹ 24,800.

Question 114.
From the following data about an economy, calculate its equilibrium level of income :
Autonomous consumption = ₹ 400
Marginal Propensity to Consume = 0.5
Investment = ₹ 4,000 (All India (C) 2014)
Answer:
Given,
Autonomous Consumption (C̅) = ₹ 400
Marginal Propensity to Consume (MPC/ b) = 0.5
Investment (I) = ₹ 4,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ + b(Y) + I
⇒ Y = 400 + 0.5 (Y) + 4,000
⇒ Y – 0.5Y = 4,400
⇒ 0.5Y = 4,400
⇒ Y = 44000.5 = 4,400 × 105 = ₹ 8,800
∴ Equilibrium level of income will be ₹ 8,800.

Question 115.
(i) Distinguish between Aggregate Demand and Aggregate Supply.
(ii) From the following data about an economy, calculate its equilibrium level of income.
Marginal Propensity to Consume = 0.8
Investment = ₹ 5,000
Autonomous consumption = ₹ 500 (All India (C) 2014)
Answer:
(i) Differences between Aggregate Demand and Aggregate Supply are

Basis	Aggregate Demand	Aggregate Supply
Meaning	Aggregate Demand (AD) refers to the total value of final goods and services that all sectors of the economy taken together are planning to ‘buy’ at a given level of income during a period of time.	Aggregate Supply (AS) means the value of final goods and services planned to be ‘produced’ by all the production units in the economy taken together during a period of time.
Components	Components of AD are private consumption expenditure, private investment expenditure, government expenditure and net exports.	Components of AS are consumption expenditure and savings.
Origin of the curve	AD curve originates from Y-axis.	AS curve originates from origin.

(ii) It is given that,
Marginal Propensity to Consume (MPC/b) = 0.8
Investment (I) = ₹ 5,000, and
Autonomous Consumption (C̅) = ₹ 500
At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I …… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 500 + 0.8Y + 5,000
Y – 0.8Y = 5,500
0.2Y = 5,500
Or Y = 5,500/0.2 = 27,500
i.e. Equilibrium level of Income (Y) = ₹ 27,500

Question 116.
In an economy C = 200 + 0.75Y is the consumption function where C is consumption expenditure and Y is National Income. Investment expenditure is ₹ 4,000. Calculate equilibrium level of income and consumption expenditure. (All India 2013)
Answer:
Consumption function (C) = 200 + 0.75Y,
Investment (I) = ₹ 4,000
Now, Y = C + I Or Y = 200 + 0.75Y + 4,000
Y – 0.75Y = 4,200 Or 0.25Y = 4,200
⇒ Y = 4200 × 10025
⇒ Y = 16,800
∴ Equilibrium income will be ₹ 16,800.
∴ Consumption Expenditure
(C) = 200 + 0.75Y = 200 + 0.75 (16,800)
= 200 + 12,600 = ₹ 12,800

Question 117.
From the following data about an economy, calculate (i) Equilibrium level of National Income and (ii) Total consumption expenditure at equilibrium level of national income.
(a) C = 200 + 05Y is the consumption function, where C is Consumption Expenditure and Y is National Income.
(b) Investment expenditure is ₹ 1,500. (All India 2013)
Answer:
(i) Consumption function (C) = 200 + 0.5Y Investment (I) = ₹ 15,000 We know that, Y = C + I
∴ Y = 200 + 0.5Y + 1,500
⇒ Y = 1,700 + 0.5Y
Or 0.5Y = 1,700
⇒ Y = 1,700 × 105 = 3,400
Equilibrium level of National Income (Y) = ₹ 3,400

(ii) Total Consumption Expenditure (C)
= 200 + 0.5Y = 200 + 0.5 (3,400)
= 200 + 1,700 = ₹ 1,900

Question 118.
From the data given below about an economy, calculate (i) Investment expenditure (ii) Consumption expenditure.
Equilibrium level of Income = ₹ 5,000
Autonomous Consumption = ₹ 500
Marginal Propensity to Consume = 0.4 (All India 2013)
Answer:
Given, Equilibrium Level of Income (Y) = ₹ 5,000,
Autonomous Consumption (C̅) = ₹ 500,
and Marginal Propensity to Consume (MPC/b) = 0.4
We know that,
Consumption (C) = C̅ + bY = 500 + 0.4 × 5,000 = 500 + 2,000
∴ Consumption (C) = ₹ 2,500
We also know that,
Income (Y) = Consumption (C) + Investment (I)
At the equilbrium level, Saving = Investment
∴ 5,000 = 2,500 + I Or I = 5,000 – 2,500 = 2,500
So, Investment Expenditure (I) = ₹ 2,500
Consumption Expenditure (C) = ₹ 2,500

Question 119.
In an economy, S = -100 + 0.6 Y is the saving function, where S is saving and Y is National Income. If investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, S = -100 + 0.6Y, and Investment Expenditure (I) = ₹ 1100
At equilibrium level of National Income, Saving = Investment
∴ -100 + 0.6Y = 1100
0.6Y = 1100 + 100
Y = 12000.6 = ₹ 2000
∴ Y = ₹ 2,000, i.e.
Equilibrium level of National Income = ₹ 2,000

(ii) Consumption expenditure at equilibrium level of National Income Income (Y) = Consumption (C) + Investment (I)
Or C = Y – I
C = 2,000 – 1,100 = ₹ 900
∴ Consumption (C) = ₹ 900

Question 120.
C = 100 + 0. 4Y is the consumption function of an economy, where C is Consumption Expenditure and Y is National Income. Investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, C = 100 + 0.4 Y, and
Investment (I) = ₹ 1,100
Equilibrium level of National Income (Y) = Consumption (C) +Investment (I)
Y= 100 + 0.4Y + 1100
Y – 0.4Y = 100 + 1,100
0.6Y = 1,200
Y = 12000.6 = 2000
i.e. Equilibrium level of income (Y) = 2000

(ii) Consumption expenditure at equilibrium
level of income
C = 100 + 0.4 Y
C = 100 + 0.4 × 2,000
C = 100 + 800 = 900
i.e. Consumption Expenditure (C) = ₹ 900

Question 121.
C = 50 + 0. 5Y is the consumption function of an economy, where C is Consumption Expenditure and Y is National Income and Investment Expenditure is ₹ 2,000 in an economy.
Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
Answer:
(i) Given, C = 50 + 0.5Y, and Investment (I) = ₹ 2000
Equilibrium level of National Income (Y) = Consumption (C) + Investment (I)
Y = 50 + 0.5y + 2000
Y – 0.5 Y = 50 + 2000 = 2050
Y = 2050/0.5 = 4100
i.e. Equilibrium level of Income (Y) = ₹ 4100

(ii) Consumption expenditure at equilibrium level of National Income
C = 50 + 0.5Y
C = 50 + 0.5 × 4100
C = 50 + 2,050
i.e. Consumption Expenditure (C) = ₹ 2,100

Question 122.
In an economy 75% of the increase in income is spent on consumption. Investment is increased by ₹ 1,000 crore. Calculate (Delhi 2010)
(i) Total increase in income.
(ii) Total increase in consumption expenditure.
Answer:
(i) Here, Marginal Propensity to Consume (MPC) = 0.75
and change in investment (ΔI) = ₹ 1000 crore
Now Multiplier (K) = 11−MPC=11−0.75 = 4
Again we know that

Or 4 = ΔY1000
Or AY = ₹ 4,000
Or Increase in Income = ₹ 4,000 crore

Or ΔC = MPC × ΔY
Or ΔC = 0.75 × 4,000
Or Increase in consumption expenditure (ΔC) = ₹ 3000 crore

Question 123.
In an economy, the equilibrium level of income is ₹ 12,000 crore. The ratio of Marginal Propensity to Consume and Marginal Propensity to Save is 3 : 1. Calculate the additional investment needed to reach new equilibrium level of income of ₹ 20,000 crore. (All India 2010)
Answer:
Here, Change in Income (ΔY) = ₹ 8,000 crore (₹ 20,000 – ₹ 12,000)
Marginal Propensity to Consume (MPC)
= 34 as (MPCMPS = 31) = 0.75
Where, MPS is the Marginal Propensity to Save
Hence, Multiplier (K)

Or Additional Investment Required = ₹ 2,000 crore

Question 124.
How is saving and investment approach derived from the Aggregate Demand and supply approach of income determination? Explain and use diagrAnswer: (Delhi (C) 2010)
Answer:
The equilibrium level of income or output is that level at which the planned savings and planned investments are equal. It is derived from Aggregate Demand and Supply approach in the following way.

Aggregate Demand (AD) in a two sector economy is defined as the sum of Consumption Expenditure(C) and Investment Expenditure (I) i.e. AD = C + I, whereas Aggregate Supply (AS) is defined as the sum of Consumption (C) and Saving (S) i.e. AS = C + S.

Mathematically, AD = AS
Or C + I = C + S
Hence, I = S
Or S = I

In the graph given, OP or OP is the equilibrium level of income. E is the equilibrium point where Aggregate Demand equals Aggregate Supply. Equality between AS and AD implies the equality between S and I. When we extend the line EP vertically downward, it meets at point E’ with S and I. It is the equilibrium point of saving and investment approach. OP or OP represents the level of income at which the economy is in equilibrium.

Question 125.
Give the meaning of involuntary unemployment. (Delhi 2017)
Or
What is involuntary unemployment? (Delhi 2014)
Answer:
Involuntary unemployment is a situation in the economy when even, if people are willing to work at existing wage rates, they are not getting work.

Question 126.
Give the meaning of deflationary gap. (All India 2014; Delhi 2010)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap.

Question 127.
What is meant by excess demand in macroeconomics? (Foreign 2014)
Or
What is excess demand in macroeconomics? (All India 2014)
Answer:
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.

Question 128.
Define inflationary gap. (All India 2014)
Or
Give the meaning of inflationary gap. (All India (C) 2012, 2010)
Answer:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

Question 129.
What is full employment? (All India 2014)
Answer:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 130.
Give the meaning of deficient demand. (Foreign 2014)
Answer:
A situation when the Aggregate Demand is less than the Aggregate Supply in an economy, corresponding to full employment, is termed as deficient demand.

Question 131.
State the impact of ‘Excess Demand’ under the Keynesian theory on employment in an economy. (All India 2019)
Or
Describe the adjustments that may take place in an economy when Ex-ante Aggregate Demand is greater than Ex-ante Aggregate Supply. (All India 2019)
Or
In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy. (All India 2014)
Or
In an economy, Aggregate Demand is greater than Aggregate Supply. Explain the changes that will take place in this economy. (Delhi (C) 2011)
Answer:
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

Question 132.
Describe the adjustments that may take place in an economy when Ex-ante savings are less than Ex-ante Investments. (All India 2019)
Answer:
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment curve, i.e households are saving less, which means that they are speeding more. This will lead to an unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock, producers will increase employment so as to increase their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 133.
Describe the adjustments that may take place in an economy when Ex-ante Savings are greater than Ex-ante Investments. (All India 2019)
Answer:
If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve, i.e. households are saving more, which means that they are spending less. This will lead to an unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers will cut back employment so as to reduce their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 134.
What is meant by inflationary gap? State three measures to reduce this gap. (March 2018)
Answer:
Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

The following are the three measures to reduce this gap

Reduction in government expenditure on public works, public welfare, defence etc.
Reduction in public expenditure on transfer payments and subsidies.
Increase in taxes to lower the disposable income with the people.

Question 135.
Explain the role of taxation in reducing excess demand. (Delhi (C) 2016)
Answer:
Excess demand refers to the situation when Aggregate Demand (AD) is in excess of Aggregate Supply (AS) corresponding to full employment in the economy.

In a situation of excess demand, government raises the rates of all taxes. This reduces the purchasing power of the people and reduces both consumption and investment expenditures. A fall in consumption and investment expenditures reduces the level of Aggregate Demand and helps to check the problem of excess demand.

Question 136.
Explain how controlling money supply is helpful in reducing excess demand. (All India 2016)
Answer:
The Reserve Bank of India controls money supply in the country with the help of its monetary policy.
The various tools of the monetary policy which are helpful in reducing excess demand are

Bank rate is increased.
Government securities are sold in the open market.
Cash reserve ratio and statutory liquidity ratio are increased.
Margin requirements are increased.
The RBI will persuade the commercial banks to make the credit costlier or decrease the availability of credit.
Credit rationing will be encouraged.

The above quantitative (i-iii) and qualitative (iv-vi) measures will decreases the money supply in the economy. As money supply decreases, it leads to decrease in liquidity in the economy. Decreased liquidity causes a fall in the level of Aggregate Demand, and hence the problem of excess demand is checked.

Question 137.
Explain the changes that take place when Aggregate Demand is less than Aggregate Supply. (All India (C) 2016)
Or
Explain the meaning of deflationary gap with the help of diagram. (All India (C) 2015)
Or
What is the meaning and implications of deflationary gap? (All India 2011)
Or
In an economy, Aggregate Demand is less than Aggregate Supply. Explain the changes that will take place in this economy. (All India 2011)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium.
This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = ADFE – ADIU = EF
Where, ADFE = AD in full employment
ADIU =AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to Aggregate Demand.

Question 138.
Give the meaning of
(i) involuntary unemployment
(ii) inflationary gap (Delhi (C) 2015)
Answer:
(i) Involuntary unemployment:
It is a situation in the economy when even, if people are willing to work at existing wage rates, they are not getting work.

(ii) Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment equilibrium in an economy, is termed as inflationary gap.

Question 139.
Give the meaning of
(i) Autonomous consumption, and
(ii) Full employment (Delhi (C) 2015)
Answer:
(i) Autonomous consumption:
The initiator minimum level of consumption required for sustenance at zero level of income is termed as autonomous consumption.

(ii) Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 140.
Give the meaning of aggregate demand and full employment. (Delhi (C) 2015)
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.

Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

Question 141.
Explain the distinction between voluntary and involuntary unemployment. (All India 2011)
Or
Distinguish between voluntary unemployment and involuntary unemployment. (Delhi (C) 2011)
Answer:
Voluntary unemployment is a kind of unemployment, when people are able to work but not willing to work at all or are not willing to work at the existing wage rate. It is self induced.

Involuntary unemployment is a situation in the economy when even if people are able and willing to work at existing wage rates, they are not getting work. Hence, they are unemployed against their wishes.

Question 142.
In the given figure, what does the gap ‘KT’ represent? State any two fiscal measures to correct the situation. (Delhi 2019)

Answer:
In the given figure, the gap KT represents inflationary gap. AD and AS represents Aggregate Demand and Aggregate Supply respectively at full employment level and ‘E’ is the point of equilibrium. AD represents actual aggregate demand which exceed aggregate demand at the point of equilibrium. This will create inflationary pressures in the economy.

Two fiscal measures to correct the situation are as follows

Increase tax
Reduce government expenditure

Question 143.
Discuss the working of the adjustment mechanism in the following situations.
(a) Aggregate demand is greater than Aggregate supply.
(b) Ex-ante investments are less than Ex-ante savings. (All India 2019)
Answer:
(a) When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

(b) If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve, i.e. households are saving more, which means that they are spending less. This will lead to an unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers will cut back employment so as to reduce their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 144.
What is monetary policy? State any three instruments of monetary policy. (April re-exam 2018)
Answer:
Monetary Policy: It is the policy of correcting excess or deficient demand in the economy by controlling the supply of credit. It regulates the cost of credit (i.e. rate of interest) and availability of credit (i.e. money supply).

The three instruments of monetary policy include

Open market operations
Cash reserve ratio
Margin requirements

Question 145.
Define full employment in an economy. Discuss the situation when Aggregate Demand is more than Aggregate Supply at full employment income level. (April re-exam 2018)
Answer:
Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full employment in an economy.

When AD is more than AS:
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output) in an economy, it will lead to inflationary pressure in the economy when price level and wage rate tends to rise. This inflationary gap encourages producers to increase their output to meet the excess demand. It will lead to gradual increase in income and output and ultimately Aggregate Supply will also increase to the point to be equal to Aggregate Demand.

Question 146.
Distinguish between Inflationary gap and Deflationary gap. (All India 2012)
Answer:
Differences between inflationary gap and deflationary gap are

Basis	Inflationary Gap	Deflationary Gap
Meaning	The excess of aggregate demand above the level that is required to maintain full employment level of equilibrium is termed as inflation any gap.	The short fall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as deflationary gap.
Effect	Inflationary gap causes inflation and increases wages and price level in the economy.	Deflationary gap causes deflation and decreases wages and price level in the economy.

Question 147.
Discuss the adjustment mechanism in the following situations. (All India 2019)
(a) Aggregate Demand is less than Aggregate Supply.
(b) Ex-ante Investments are greater then Ex-ante Savings.
Answer:
(a) Adjustment mechanism when aggregate demand is less than aggregate supply:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium.
This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = ADFE – ADIU = EF
Where, ADFE = AD in full employment
ADIU = AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to Aggregate Demand.

(b) Adjustment mechanism when ex-ante investments are greater than ex-ante savings:
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment curve, i.e households are saving less, which means that they are speeding more. This will lead to an unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock, producers will increase employment so as to increase their output and they will come back to output level where savings become equal to investment and there is thus no further tendency to change.

Question 148.
What are two alternative ways of determining equilibrium level of income? How are these related? (April re-exam 2018)
Answer:
The equilibrium level of income/output can be studied with the help of following two approach
1. AS = AD approach Equilibrium level of output in an economy is determined at a point where planned spending (i.e. AD = C + I) equals to planned output (i.e.Y/AS = C + S).
2. S = I approach Equilibrium output /GDP is achieved, when S = I.
Both Approach are Interrelated We know that,
= + = + =
In simple words, we can say that equality between AS and AD implies the equality between S and I. We can explain it with the help of following diagram

There is one and only one equilibrium of GDP, when AS = AD (i.e Y = AD) or when S = I. In either case, the equilibrium of GDP= OQ.

Question 149.
Explain the situation of deficient demand in an economy. Also explain the role of repo rate in correcting his. (All India (C) 2016)
Answer:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment level
ADIU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF

Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the economy and the problem of deficient demand is checked.

Question 150.
State whether the following statements are true or false. Give reasons for your answer.
(i) Inventories accumulate when planned investment is less than planned saving.
(ii) Inflationary gap exists when Aggregate Demand is greater than Aggregate Supply.
(iii) Average Propensity to Save can be negative. (Delhi (C) 2016)
Answer:
(i) The given statement is True. When planned investment is less than planned savings, then in such a situation, Aggregate Demand is less than Aggregate Supply which leads to accumulation of inventories.
(ii) The given statement is False. Inflationary gap exists when at full employment level aggregate demand is greater than aggregate supply.
(iii) The given statement is True. APS can be negative when consumption expenditure exceeds income.

Question 151.
What is ‘Inflationary Gap’? Explain the role of Cash Reserve Ratio in removing this gap. (Foreign 2015)
Or
Explain the concept of inflationary gap. Also, explain the role of legal reserves in reducing it. (All India 2011,2010)
Or
Define and represent inflationary gap on a diagram. Explain the role of the varying reserves requirement in removing the gap. (Delhi (C) 2010)
Answer:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

In the above figure,
ADFE = AD at full employment level
ADAE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= ADAE – ADFE = EF

Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

Question 152.
What is ‘deficient demand’? Explain the role of ‘Margin Requirements’ in removing this gap. (Foreign 2015)
Or
Explain the concept of deflationary gap. Also, explain the role of margin requirement in reducing it. (All India 2012,2011, 2010)
Answer:
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

Role of margin requirements to reduce deflationary gap Margin requirement refers to the difference between the amount of loan granted and the current value of security offered for lo

Answer: In case of deflationary gap, the margin requirements are lowered to increase the flow of credit by encouraging people to borrow. As a result of that, the Aggregate Demand increases and ultimately the economy attains equilibrium.

Question 153.
Explain the concept of inflationary gap. Explain the role of ‘repo rate’ in reducing this gap. (Delhi 2015)
Answer:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

Role of repo rate in reducing inflationary gap:
Repo rate refers to the rate at which commercial banks can borrow from Central Bank against some approved securities for a shorter period of time. In the situation of inflation Central Bank increases repo rate which makes credit dearer (cost of borrowings increases), hence liquidity falls, which helps in bringing down the inflation rate through fall in Aggregate Demand.

Question 154.
Explain the concept of deflationary gap and the role of ‘open market operations’ in reducing this gap. (Delhi 2015)
Answer:
Deflationary gap or deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

Role of open market operations in reducing deflationary gap Open market operations refers to the buying and selling of securities in the open market to the general public and commercial banks by the Central Bank.

In the situation of deflationary gap. Central Bank opts for open market purchases. This process leads to increase in the money supply in the economy and hence increase in Aggregate Demand to check the deflationary gap.

Question 155.
What is ‘Deficient Demand’? Explain the role of ‘bank rate’ in removing it. (All India 2015)
Or
Explain the concept of deficient demand in macroeconomics. Also, explain the role of bank rate in correcting it. (Delhi 2012: All India 2011)
Answer:
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

Role of bank rate in correcting the problem of deficient demand The rate at which the Central Bank lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central Bank reduces the bank rate to increase the money supply in the economy.

Reduction in bank rate increases the credit/money creation capacity of commercial banks and also reduces the market rate of interest which encourages people to borrow more. In this way, the Aggregate Demand increases to the level of Aggregate Supply and the economy attains equilibrium.

Question 156.
What is ‘excess demand’? Explain the role of ‘reverse repo rate’ in removing it. (All India 2015)
Answer:
Excess demand or inflationary gap:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand causes inflation in the economy and price levels tend to rise.

Role of ‘reverse repo rate’ in correcting the problem of excess demand Reverse repo rate is the rate at which commercial banks keep their excess funds with the Central Bank, or in other words, the rate at which Central Bank borrows from commercial banks. In the situation of excess demand. Central Bank raises the ‘reverse repo rate’ which locks the excess liquidity of commercial banks with Central Bank, hence it causes a fall in Aggregate Demand to attain the full employment equilibrium.

Question 157.
Explain the changes that take place when aggregate demand and aggregate supply are not equal. (Delhi 2015)
Or
Explain National Income equilibrium through Aggreate Demand and Aggregate Supply. Use diagram. Also explain the changes that take place in an economy when the economy is not in equilibrium. (Delhi 2014)
Answer:
In an economy, equilibrium level of income and employment is determined when Aggregate Demand (AD) is equal to Aggregate Supply (AS). According to Keynes, Aggregate Supply may be assumed to be perfectly elastic in an economy where full employment of resources is yet to be achieved. Accordingly, Aggregate Demand becomes the principal determinant of equilibrium level of income. In the following figure, AD represents Aggregate Demand curve and 45° line is the line of reference, representing Aggregate Supply (AS). Equilibrium level of income Yis determined at point E, where AD = AS.

Prior to point E, Aggregate Demand exceeds Aggregate Supply, it means demand for goods and services in economy is more than their flow. To increase inventory upto desirable level, firms would plan to increase output which increases output and income level in economy. This process will continue till AD and AS become equal to each other.
Beyond that point, Aggregate Supply exceeds Aggregate Demand, it means demand for goods and services in the economy is less than their flow. To clear excess inventory, firm would plan to reduce output which decreases output and income level. This process will continue till AD and AS become equal to each other.

When AS = AD the equilibrium is struck. Because the equality between AS and AD implies that the desired level of output in the economy (as indicated by AS) is exactly equal to the desired level of expenditure (indicated by AD) In the economy.

Question 158.
In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy. (All India (C) 2015)
Answer:
If in an economy, planned spending, i.e. aggregate demand is greater than the planned output i.e. aggregate supply then the following changes will take place in the economy.

(i) Since the aggregate demand exceeds aggregate supply, therefore the existing stocks of the producers will be sold out.
(ii) To rebuild the desired stocks, so as to be able to meet the demand, the producers would plan greater production.
(iii) This decision of producers will increase the level of aggregate supply, till the point it converges with aggregate demand, as is shown in the diagram given above.

Question 159.
When is an economy in equilibrium? Explain with the help of saving and investment function. Also, explain the changes that take place in an economy when the economy is not in equilibrium. Use diagram. (All India 2014)
Answer:
Equilibrium level of income is determined at a point, where ex-ante or planned saving is equal to planned investment. This is because, in equilibrium
Aggreate Supply (AS) = Aggreate Demand (AD),
Or Consumption (C) + Saving (S)
= Consumption (C) + Investment (I),
Or Saving (S) = Investment (I).
In the diagram given below,
E is the point where S = 1,
Hence, the point at which the economy is in equilibrium. OY is the equilibrium level of National Incomes.

When savings are greater than investment in an economy, it refers to AD < AS. There will be a rise in inventory stock and prices will start to fall. To clear their stocks, the producers would now plan lesser output. This would mean lesser income in the economy. Lesser income implies lesser saving. The process would continue till S = I.

But if investments are more than savings, it means that AS < AD. Stocks would reduce and prices will start to rise. To stand benefited from such a condition, the producers will increase their production, leading to an increase in investments. The process would continue till S = I. Question 160. Explain all the changes that will take place in an economy when Aggregate Demand is not equal to Aggregate Supply. (All India 2013) Answer: There may be two possible conditions (i) Aggregate Demand is greater than Aggregate Supply (AD > AS) When AD is greater than AS, flow of goods and services in the economy tends to be less than their demand. The existing stocks of the producers would be sold out. To rebuild the desired stocks the producer would plan greater production. AS would increase to become equal to AD.

(ii) Aggregate Demand is less than Aggregate Supply (AD < AS) When AD is less than AS, flow of goods and services in the economy tends to exceed their demand. As a result, some of the goods would remain unsold. To clear unwanted stocks, the producers would plan a cut in production. Consequently, AS would reduce to become equal to AD. This is how AS adapts itself to AD.

Question 161
Distinguish between Inflationary Gap and Deflationary Gap. State two measures by which these can be corrected. (All India 2013)
Answer:
Differences between inflationary gap and deflationary gap:

Basis	Inflationary Gap	Deflationary Gap
Meaning	The excess of aggregate demand above the level that is required to maintain full employment level of equilibrium is termed as inflation any gap.	The short fall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as deflationary gap.
Effect	Inflationary gap causes inflation and increases wages and price level in the economy.	Deflationary gap causes deflation and decreases wages and price level in the economy.

Two measures by which inflationary gap can be corrected
(i) Increase in bank rate
(ii) Increase in repo rate

Two measures by which deflationary gap can be corrected
(i) Decrease in bank rate
(ii) Decrease in repo rate

Question 162.
Explain the meaning of under employment equilibrium. Explain two measures by which full employment equilibrium can be reached. (All India 2013)
Answer:
In an economy, when AS = AD or S = I but without the fuller utilisation of labour force, the economy is said to be in under employment equilibrium. Under employment, equilibrium occurs when AS = AD but without the fuller utilisation of labour force.

Measures to correct under employment equilibrium:
(i) Bank rate Central Bank should decrease the bank rate. A decrease in bank rate lowers the rate of interest and credit becomes cheap. Accordingly, the demand for credit expands and Aggregate Demand increases.
(ii) Open market operations By buying the government securities, the Central Bank injects additional purchasing power into the system which results in the expansion of credit. As a result. Aggregate Demand increases.

Question 163.
Explain the concept of excess demand in macroeconomics. Also, explain the role of open market operation in correcting it. (Delhi 2012)
Answer:
Excess demand:
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply corresponding to full employment, it is termed as excess demand situation.

Role of open market operations to correct the problem of excess demand Open market operations refer to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of citizens of the country.

In case of excess demand, the Central Bank sells its securities to common public and financial institutions. It reduces the supply of money in the economy and reduces the money/credit creation power of commercial banks. Thus, the Aggregate Demand comes down and the economy attains equilibrium.

Question 164.
Explain the role of the following in correcting deficient demand in an economy.
(i) Open market operations
(ii) Bank rate (Delhi 2012, 2011, 2010)
Answer:
(i) Role of open market operations in correcting deficient demand Open market operations refers to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of commercial banks and citizens of the country. In case of deficient demand, the Central Bank purchase securities from public and financial institutions. It increases the supply of money in the economy as well as credit/money creation power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy attains equilibrium.

(ii) Role of bank rate in correcting Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand (AD) from the level that is required to maintain a full employment equilibrium. This short fall is termed as deflationary gap or deficient demand.

Question 165.
Explain the role of the following in correcting the inflationary gap in an economy:
(i) Legal reserves
(ii) Bank rate (All India 2011)
Answer:
(i) Legal Reserves:
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary gap.
Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total demand and time deposits in the form of cash and other liquid assets with the Central Bank. This ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank increases the CRR. It reduces the supply of money and credit money creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation.

Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the form of cash or other liquid assets that is required to be maintained by the bank with themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity of commercial banks and reduces the flow of money in the economy. As a result of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

(ii) Bank Rate – The rate at which Central Bank lends money to Commercial Banks is termed as bank rate. In case of inflationary gap in the economy, the Central Bank increases the bank rate to reduce the money supply in the economy. Increase in bank rate reduces the money/credit creation power of commercial banks and also increases the market rate of interest which discourages people to borrow more. In this way, the Aggregate Demand falls in the economy and equilibrium is restored.

Question 166.
Explain the role of the following in correcting the deflationary gap in an economy (All India 2011)
(i) Open market operations.
(ii) Margin requirements.
Answer:
(i) Open market operations:
Role of open market operations in correcting deficient demand Open market operations refers to sale and purchase of securities by the Central Bank on behalf of government in the open market. It directly affects the supply of money in the hands of commercial banks and citizens of the country. In case of deficient demand, the Central Bank purchase securities from public and financial institutions. It increases the supply of money in the economy as well as credit/money creation power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy attains equilibrium.

(ii) Margin requirements:
Role of margin requirements to reduce deflationary gap Margin requirement refers to the difference between the amount of loan granted and the current value of security offered for loans. In case of deflationary gap, the margin requirements are lowered to increase the flow of credit by encouraging people to borrow. As a result of that, the Aggregate Demand increases and ultimately the economy attains equilibrium.