Solution
THEORY OF INCOME AND EMPLOYMENT
Class 12 - Economics
1. (b) negative
Explanation: When income is 0, savings will be negative.
2. (c) Change in Savings
Change in Income ( ΔS
ΔY
Explanation: Change in Savings ΔS
Change in Income (
ΔY
3. (b) 0
C
Explanation: APC = = 1000 = 1
Y 1000
Thus, APS = 1 - APC = 1 - 1 = 0
4. (d) APC
Explanation: APC
5. (a) ₹ 1,000 crores
Explanation: Change in income₹ 1,000 crores
250
0.25
= 1000
Change in Income ΔY
6. (d)
Change in (ΔC
Consumption
Explanation: Change in Income
Change in Consumption
(
ΔY
ΔC
7. (c) APS = 0
Explanation: APS=0 , implies that all income is consumed
Thus, APC=Y/Y=1
As , Y=C.(all income is consumed
8. (a) C
Explanation: MPS can be between 0 and 1.
9. (d) MPC
Explanation: Since, MPS = 1 - b = 1 -
MPC. Hence, 'b' must be MPC.
10. (b) MPS
Explanation: (1 - b)Y denotes induced savings where (1 - b) denotes MPS. MPS is a part of saving function whereas MPC
is a part of the consumption function.
11. (b) (1 - b) i.e. MPS is positive
Explanation: b stands for MPC. So, when b is less than 1, evidently 1 - b is positive or 1 - b > 0.
12. (c) Autonomous savings
Explanation: 'a' is constant which implies that this saving takes place even when income is zero and is independent of the
level of income. So, 'a' denotes autonomous savings.
13. (a) All of these
Explanation: By increasing bank rate, selling government securities by RBI and increasing cash reserve ratio decrease the
aggregate demand in an economy.
14. (c) Autonomous consumption expenditure
Explanation: Here, 'a' is a constant which denotes autonomous consumption. This consumption is not induced by income
changes.
15. (b) Level of savings
Explanation: The given function is an algebraic linear function of savings where S denotes the level of savings, having
two parts: autonomous savings and induced savings. a is autonomous consumption and b is MPC
16. (d) zero
Explanation: APC can never be zero.
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17. (d)
Consumption
( ) C
Inco
Explanation:
Y
Consumption
Income
( ) Y
C
18. (b) ex post measures
Explanation: ex post measures
19. (b) Rs. 5000
Explanation: K=1/1-MPC=1/1-0.8=1/0.2=5.
It means that income will multiply five times the initial
income. So, New income= 5×1000=5000.
20. (c) ₹ 270 crore
Explanation: ₹ 270
crore 21. (a) 1
Explanation: MPC + MPS = 1
22. (d) Consumption expenditure
Explanation: It is a linear consumption function where 'C' represents consumption expenditure.
23. (b) will remain unaffected
Explanation: If income increases then autonomous expenditure will remain unaffected.
24. (b) ₹ 40
Explanation: ₹ 40
25. (d) 1
Explanation: 1 (because change is income is 100 cr. and change in consumption is 100 cr).
26. (b) The value of consumption exceeds the value of income
Explanation: When consumption expenditure exceeds income, we have negative savings. Thus, APS being the function of
saving is negative.
27. (d) -200
Explanation: -200
28. (d) both saving curve will be a straight line and saving function will be linear
Explanation: both saving curve will be a straight line and saving function will be linear
29. (b) 4000
Explanation: Here, MPC = 0.8
K = 1 = 1 =5
1−0.8 0.2
Δy
ΔI=5
Δy = 5ΔI --- (i)
Also, 1 = 5
ΔC
1− Δy
Δy
Δy−Δc=5
Δy = 5(Δy − Δc) --- (ii)
from (i) and (ii) we get,
5ΔI = 5(Δy − Δc)
1000 = 5000 − Δc --- using (i)
Δc = 4000
Change in Consumption expenditure is ₹4000
30. (a) The value of consumption exceeds the value of income
C
Explanation: APC =
Y
APC > 1 when C > Y
31. (a) The level of income
Explanation: Consumption is a function of income.
f(Y )
C = f(Y) and APC = C = .
Y Y
So, Income is an important factor influencing propensity to consume in an economy.
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32. (c) Algebraic function of the level of Savings
Explanation:
33. (d) The level of income (Y)
Explanation: Saving is a function of income
S = f(Y)
f(Y )
S
So, APS = =
Y Y
The functional relationship between S and Y is called the saving function.
34. (a) C + I + G + (x - m)
Explanation: AD=C + I + G + (X - M)
35. (d) autonomous consumption is positive
Explanation: autonomous consumption is positive
36. (b) Profits
Explanation: Profits are not part of aggregate demand.
37. (a) ₹ 200 crore
Explanation: ₹ 200 crore
38. (a) 1
C 1000
Explanation: Since APC = = =1
Y 1000
Thus, APS = 1 - APC = 1 - 1 =
0 Now, APC + APS = 1 + 0 = 1
39. (b) Consumption, National Income
Explanation: Consumption, National Income
40. (d) True.
Explanation: Value of APS is negative when consumption expenditure is greater than income.For example , if income =
Rs.1000, consumption = 1200.
Then, saving = - 200. (negative
saving) APS = - 200/1000= - 0.2
41. (a) K = 1
1−MPC
Explanation: K = 1
1−MPC
Where, 1 - MPC = MPS
42. (b) 1 and ∞
Explanation: 1 and ∞
43. (c) ∞
Explanation: ∞
1
44. (a) MPS
1
Explanation:
MPS
45. (c) Resources are fully and efficiently utilised.
Explanation: Under-employment equilibrium means equality between aggregate demand and aggregate supply but at less than
full employment. It is a state of equilibrium where the level of demand is less than the full employment level of output. It
means recourses are not fully and efficiently utilised.
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46. (a) 4 times
Explanation: 4 times
47. (a) 0.25
Explanation: K = Δ Y ÷ Δ I
K=4
K = 1 ÷
MPS MPS =
1 ÷ K MPS
= 0.25
48. (a) Change in the income to the change in the investment
Explanation: Investment multiplier implies that investment multiplies income and the extent of increase in income is given by
K.
K=
ΔY or K × ΔI = ΔY
ΔI
Where K is multiplier,
49. (a) 2 times
Explanation: 2 times
50. (d) full employment equilibrium
Explanation: full employment equilibrium
51. (c) Option (iii)
Explanation: Aggregate Demand-curve intersects 45° line
52. (b) Y = A + bY
Explanation: Y = A + bY
53. (b) 2
Explanation: MPC= MPS = 0.5
K = 1 ÷ MPS
K=2
54. (b) National income = Consumption
Explanation: National income = Consumption
55. (d) As income increases, savings increases
Explanation: There is positive relation between income and savings. As income income increases, savings also increases.
56. (c) MPC
Explanation: We know that multiplier is a function of MPC
1
K=
1−MPC
1
57. (b) MPS
1
Explanation:
MPS
58. (c) Aggregate demand = Aggregate supply
Explanation: Equilibrium output refers to that level of output in the economy where AS= AD. AS refers to the desired level
of output in the economy. AD, on the other hand, refers to the level of GDP that the buyers wish to buy during an
accounting year. Equilibrium GDP means that level of GDP where what the producers wish to produce is exactly equal to what
the buyers wish to buy during an accounting year.
59. (a) 5
Explanation: K=1/1-mpc
= 1/1-0.8
=1/0.2
=5
60. (c) Option (iv)
Explanation: Option (iv)
61. (d) Aggregate Demand = Aggregate Supply
Explanation: Aggregate Demand = Aggregate Supply
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62. (d) Gain to creditors
Explanation: Gain to creditors
63. (a) cost of credit should be reduced
Explanation: cost of credit should be reduced
64. (c) Aggregate Demand (Expected) > Aggregate Demand (Full employment)
Explanation: Aggregate Demand (Expected) > Aggregate Demand (Full employment)
65. (c) excess demand
Explanation: excess demand
66. (d) Government of India
Explanation: Government of India
67. (d) Deficit financing
Explanation: Deficit financing
68. (d) inflationary gap
Explanation: inflationary gap
69. (a) increase in exports
Explanation: increase in exports
70. (c) Decrease in bank rate
Explanation: Decrease in bank rate
71. (c) Reduction in government spending leads to fall in income.
Explanation: Reduction in government spending leads to fall in income.
72. (a) budgetary policy
Explanation: budgetary policy
73. (c) Decrease in govt. expenditure
Explanation: Decrease in govt. expenditure
74. (a) Cut in the cost of credit
Explanation: Cut in the cost of credit
75. (a) AD < AS (corresponding to full employment level)
Explanation: AD < AS (corresponding to full employment level)
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