CBSE Class 12 Economics Income Determination Worksheet

Question. In an open economy, aggregate demand is estimated as:
(a) private consumption expenditure + private investment expenditure + government expenditure + exports
(b) private consumption expenditure + private investment expenditure + government expenditure + imports
(c) private investment expenditure + government expenditure + net exports
(d) private consumption expenditure + private investment expenditure + government expenditure + net exports 
Answer: D

Question. The value of multiplier is :
(a) 1/MPC
(b) 1/MPS
(c) 1/1- MPS
(d) 1/MPC-1
Answer: B

Question. Equilibrium level of income/output is established when:
(a) AS = AD
(b) C = I
(c) S = Y
(d) none of these
Answer: A

Question. If MPC = 1, the value of multiplier is :
(a) 0
(b) 1
(c) Between 0 and 1
(d) Infinity
Answer: D

Question. AD schedule shows the relationship between:
(a) AD and Y
(b) AD and AS
(c) C and S
(d) All of these 
Answer: A

Question. If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be
(a) greater than 2
(b) less than 2
(c) equal to 2
(d) equal to 5
Answer: A

Question. If MPS = 0, the value of multiplier will be :
(a) 2
(b) 1
(c) 0
(d) ∞
Answer: D

Question. Desired saving during an accounting year is called:
(a) ex-ante saving
(b) ex-post saving
(c) actual saving
(d) none of these
Answer: A

Question. If the value of MPS is 0.4. What will be the value of investment multipliers ?
(a) 3
(b) 4
(c) 2.5
(d) 2
Answer: C

Question. AD is:
(a) positively related to Y
(b) negatively related to Y
(c) not related to Y
(d) always equal to Y 
Answer: A

Question. Level of planned output coincides with planned expenditure when:
(a) AD = AS
(b) C = I
(c) both (a) and (b)
(d) none of these 
Answer: A

Question. Which ofthe following is correct in reference of equilibrium level of GDP:
(a) Y= C + MPC(Y) - I
(b) Y= C + MPC(Y) + I
(c) Y= C - MPC(Y) - I 
(d) Y= C - MPC(Y) + I
Answer: B

Question. AD curve:
(a) is a diagrammatic presentation of AD schedule
(b) shows unplanned expenditure on goods and services to different levels of income in the economy economy
(c) indicates sum total of investment expenditure
(d) both (a) and (b) 
Answer: A

Question. In a situation of S < I:
(a) fall in expenditure through ‘S’ < rise in expenditure through ‘I’
(b) fall in expenditure through ‘S’ > rise in expenditure through ‘I’
(c) AD > AS
(d) both (a) and (c)
Answer: D

Question. When the planned flow of goods and services in the economy is less than their planned demand:
(a) AS = AD
(b) AS > AD
(c) AS < AD
(d) none of these
Answer: C

Question. Consumption depends on:
(a) income
(b) saving
(c) Aggregate Demand
(d) Both (a) and (b)
Answer: A

Question. Average Propensity to Consume =
(a) C/Y
(b) ΔC/ΔY
(c) C-Y
(d) ΔY/ΔC
Answer: A

Question. Marginal Propensity to Save =
(a) ΔS-ΔY
(b) Y/S
(c) ΔS/ΔY
(d) S-Y
Answer: C

Question. C indicates:
(a) consumption related to income
(b) saving related to income
(c) minimum consumption level even when income is zero
(d) none of the these
Answer: C

Fill in the blanks:

Question. ______establishes the relation between investment and income.
Answer: Multiplier 

Question. Ex-post investment refers to _______in the economy during the period of one year.
Answer: actual investment 

Question. _________refers to that investment which changes as the level of income changes in the economy.
Answer: Induced investment 

Question. _________is the minimum value of investment multiplier.
Answer: 1

Question. Aggregate demand refers to ___________ on domestically produced goods and services during the period of an accounting year.
Answer: planned expenditure

Question. _________ refers to desired or planned investment corresponding to different income levels in the economy.
Answer: Ex-Ante investment 

Question. ________ is the ratio of change in consumption expenditure to change in income.
Answer: MPC 

Question. The ratio of total consumption expenditure to total income is called ___________ .
Answer: APC

True or false:

Question. Equilibrium GDP refers to that level of GDP where AD = AS but S<I. U
Answer: False.

Question. Under employment equilibrium refers to the situation when people who are able and willing to work at the prevailing wage rate but do not get employment. U
Answer: False.

Question. Autonomous investment refers to investment which is dependent on the level of income in the economy.
Answer: False.

Question. An economy can attain the maximum equilibrium GDP level even when excess capacity is not fully exhausted. 
Answer: False.

Question. When MPS = 1, the value of investment multiplier is also 1.
Answer: True.

Question. Value of multiplier will be infinity of entire additional income consumption is converted into additional consumption.
Answer: True.

Short Answer Type Questions

Question. Differentiate between Aggregate Demand and Aggregate Supply.
Answer: Aggregate Demand : It refers to total value of final goods and services which all the sectors of an economy are planning to buy at a given level of income during a period of an accounting year. 1½ Aggregate Supply : It refers to money value of goods and services that all the producers are willing to supply in an economy in a given time period.

Question. Distinguish between Consumption Function equation and Saving Function equation. 
Answer: Consumption Function equation :
C = C– + MPC (Y) 1 Where C = Total Consumption C– = Autonomous Consumption MPC = Marginal Propensity to Consume
Y = Income Saving Function equation :
S = (–) S– + MPS (Y) 
S– = Level of savings when income is
S = Total Saving MPS
= Marginal Propensity to Save
Y = National Income

Question. What is investment multiplier ? How is its value determined ? What can be its minimum and maximum value ?
OR
Explain the meaning of Investment Multiplier. What can be its minimum and maximum value ?
Answer: When investment expenditure increases, there is multiple increase in income. The rates of increase in income to increase in investment expenditure are the value of multiplier. Its value equals
1/1- MPC or 1/MPS or ΔY/ΔI
Its minimum value is ‘one’ while the maximum value is infinity.

Question. Explain how the economy achieves equilibrium level of income using Consumption + Investment (C + I) approach. 
Answer: C + I approach
Aggregate demand, given by C + I, is the planned demand by the various sectors of the economy.
Whether this planned demand is realized or not, depends on amount of goods and services (aggregate output or Y) produced in the economy.
Thus, it is only when planned expenditure is equal to the aggregate output does the economy achieving equilibrium.
i.e., AD = Y
If AD > Y, inventory level with producers falls
and they increase output. This happens till AD = Y
Opposite happens if AD < y.

Question. Explain the relationship between Investment Multiplier and Marginal Propensity to Consume.
Answer: Investment Multiplier = 1/1- MPC . It shows a direct relationship between MPC and the value of multiplier. Higher the proportion of increased income spend on consumption, higher will be the value of investment multiplier.

Question. Give the meaning of Average Propensity to Save. What is its relation with Average Propensity to Consume. 
Answer: Average Propensity to Save (APS)—it is the ratio of saving and income i.e.
APS = Savings/Income
Relation with Average Propensity to Consume—The sum of Average Propensity to Save (APS) and Average Propensity to Consume (APC) is one. APS + APC = 1

Question. Distinguish between average propensity to consume and average propensity to save. What is the relation between the two?
Answer: APC equals to total consumption expenditure divided by total income whereas, APS equals total savings divided by total income.
APC + APS = 1

Question. 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. 
OR
Define investment multiplier. How is it related to marginal propensity to consume.
Answer: Multiplier (investment multiplier) is a measure of the effect of change in initial investment on change in final income. 
There exist a direct relation between MPC and multiplier. Higher the value of MPC, the higher is the value of multiplier.
K = 1/1-MPC
4 = 1/1-MPC
MPC = 0.75

Question. What is the relationship between :
(i) Average propensity to consume and average propensity to save. (ii) Marginal propensity to consume and investment multiplier. 
Answer: (i) The sum of APC and APS is equal to 1.
(ii) The higher the MPC, the greater is the value of multiplier. 

Question. What is the relationship between :
(i) Marginal propensity to save and marginal propensity to consume. (ii) Marginal propensity to save and investment multiplier.
Answer: (i) The sum of MPC and MPS is equal to
(ii) The higher the MPS, the lower is the value of multiplier.

Question. Explain how the economy achieves equilibrium level of income using Savings Investment (S-I) approach. 
Answer: As per the S-I approach, equilibrium if achieved where Ex-Ante Savings are equal to Ex-Ante Investments. Saving and investments indicate leakages and injections are equal to each other.

Question. Explain the meaning of Marginal Propensity to Consume. What is its relationship with Marginal Propensity to Save ?
Answer: Marginal Propensity to Consume : Change in Consumption due to change in income is known as Marginal Propensity to Consume. Marginal Propensity to Consume plus Marginal Propensity to save is always equal to 1. MPC + MPS = 1

Question. In an economy Investment is increased by ₹ 300 crore. If Marginal Propensity to Consume is 2/3 calculate increase in National Income.
Answer: ΔY = ΔI 1/1 − MPC
= 300 2/1-2/3
= 300 × 3 = 900 crore

Question. What is the difference between marginal propensity to consume and marginal propensity to save? What is the relation between the two?
Answer: Marginal Propensity to Consume is the ratio of Change in Consumption due to change in income
MPC = ΔC/ΔY
Whereas marginal propensity to save is the ratio of change in saving to change in income
MPS = ΔS/ΔY
Marginal Propensity to Consume plus Marginal
Propensity to save is always equal to 1. MPC + MPS = 1.

Question. Explain the meaning of under-employment equilibrium. 
Answer: When aggregate demand is equal to aggregate supply at less than full employment it is a situation of under employment equilibrium i.e., when equilibrium is at less than full employment.

Question. Suppose Marginal Propensity to Consume is 0.8. How much increase in Investment is required to increase National Income by ₹ 2,000 crore ? Calculate.
Answer: ∆Y = ∆I 1/1 −MPC
2,000 = ∆I 1/1-0.8
2,000 = ∆I/0.2
∆I = 400 crore

Question. Distinguish between Marginal Propensity to Consume and Average Propensity to Consume.
Give a numerical example.
Answer: Marginal Propensity to Consume is the ratio of change in consumption expenditure (C) to change in total income (Y).
Suppose ΔC = 70 and ΔY = 100
then, MPC = 70/100 = 0.7
Average Propensity to Consume is the ratio of total consumption expenditure (C) to total income (Y).
Suppose C = 80 and Y = 100
then, APC = 80/100 = 0.8

b. AD

 

7. Aggregate demand can be increased by :

a. Increasing bank rate

b. Selling bank securities by Reserve bank of india

c. Increasing cash reserve ratio

d. None of the above

 

8. At the break-even point:

a. C > Y c. C = Y

b. C < Y d. None of these

 

9. Out of the following which value can be greater than one?

a. APC c. APS

b. MPC d. MPS

 

10. According to which economist national income can be determined even below the full employment level :

a. Adam smith c. J.B Say

b. J.M Keynes d. None of these

 

SHORT ANSWER QUESTIONS ( 3/ 4 MARKS )

 

1. How much is the value of MPS in an economy when MPS = 0.8?

 

2. If the households save ₹ 500 crores out of a total income of ₹5,000 crores in an economy. Calculate MPC.

 

3. If the total income increases from ₹ 5,000 crore to ₹6,000 crore and consumption increase from ₹1,000 crore to ₹1,500, calculate MPC.

 

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

 

5. If APC of an economy is 0.8, what shall be savings at the income level of ₹2, 000 crores?

 

7. If MPC is 0.75, calculate the value of multiplier.

 

8. In an economy MPC is 0.8 and investment increases by ₹1, 000 crores. Calculate the total increase in income.

 

9. If an increase of ₹10, 000 in investment results in an increase in income of ₹40, 000,calculate MPS in the economy.

 

10. Calculate the change in income when MPC =0.8 and change in investment is ₹1, 000 crores.

 

11. Write the relation between MPC and multiplier.

 

12. Distinguish APC and APS

 

LONG ANSWER QUESTIONS ( 6 MARKS )

 

13. Explain consumption function using numerical example and diagram.

 

14. Explain the steps to derive saving curve from consumption curve. Use diagram

 

15. A change in investment results in change in National Income. Elucidate.

 

16. How does an economy reach equilibrium? Use saving and Investment curve,

 

17. What are the changes take place in the economy when AD is not equal to AS.

 

18. Explain the role of monetary measures to correct deflationary gap.

 

19. What is excess demand? How fiscal measures help to correct this situation?

 

20. In an economy C = 25 + 0.8 Y and Investment = 75 crore. Calculate

a) Equilibrium National Income

b) Consumption at equilibrium income

 

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