PRACTICE TEST SERIES 2023-2024

Test 03| Macro | Determination of Income and Employment |

Time allowed: 1.5 hours Maximum Marks: 40

General instructions:
 This paper contains 10 Multiple Choice Questions type questions of 1 mark each.
 This paper contains 2 Short Answer Questions type questions of 3 marks each to be
answered in 60 to 80 words.
 This paper contains 3 Short Answer Questions type questions of 4 marks each to be
answered in 80 to 100 words.
 This paper contains 2 Long Answer Questions type question of 6 marks to be
answered in 100 to 150 words.
Q1. Read the following statements: Assertion (A) and Reason (R). Choose the correct
alternative given below:
Assertion (A): Before reaching the Break-Even level of income, the value of Average
Propensity to Consume (APC) is greater than one.
Reason (R): The Average Propensity to Consume (APC) is the ratio of the total
consumption and total income.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct
explanation of Assertion (A).
(c) Assertion (A) is true and Reason (R) is false.
(d) Assertion (A) is false and Reason (R) is true.
Q2. Column-A Column-B
(i) Multiplier (k) A- National Income will rise
(ii) When AD > AS B- Direct Relationship
(iii) Under Employment C- AD = AS when the resources are not fully
Equilibrium employed
(iv) Multiplier and MPC D- Planned inventory falls below the desired
level
(v) When S < I E – 1/1 – MPC
Options
(a) i – A, ii – B, iii-C, iv-D, v-E (b) i – B, ii – C, iii-D, iv-E, v-A
(c) i – E, ii – D, iii-C, iv-B, v-A (d) i – C, ii – A, iii-B, iv-D, v-E
Q3. Read the following statement -Assertion (A) and Reason (R). Choose one of the
correct alternatives given below:
Assertion (A): The saving curve makes a negative intercept on the vertical axis at a
zero level of income.
Reason (R): The saving function refers to the functional relationship between saving
and income.
 Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Q4. The amount by which actual aggregate demand exceeds the aggregate supply
corresponding to full employment is known as;
(a) Excess demand (b) Excess supply
(c) Inflation (d) Inflationary gap
Q5. For the given Consumption function, C = 205 + 0•9 Y, the value of investment
multiplier would be
(Choose the correct alternative to fill up the blank)
(a) 0•09 (b) 10•0 (c) 0•9 (d) 9•0
Q6. Relationship of APC and APS with national income can be represented as :
(a) Both APC and APS fall with increase in National Income
(b) Both APC and APS rise with increase in National Income
(c) APS fall, while APC rise with increase in National Income
(d) APC fall, while APS rise with increase in National Income
Q7. Suppose in a hypothetical economy, the income rise from Rs 5,000 crores to Rs 6,000
crores, As a result, the consumption expenditure rises from Rs 4,000 crores to Rs
4,600 crores, Marginal propensity to consume in such a case would be –
(a) 0.8 (b) 0.4 (c) 0.2 (d) 0.6
Q8. Column-A Column-B
(i) Breakeven point A- Value varies between 0 and 1
(ii) Autonomous Consumption B- Propensity to Consume
(iii) MPS C- Consumption = National Income
(iv) APC D- Consumption at zero level of National Income
(v) Consumption Function E – C/Y
Options
(a) i –A, ii- B, iii-C, iv-D, v-E (b) i –B, ii- A, iii-D, iv-C, v-E
(c) i –C, ii- D, iii-A, iv-E, v-B (d) i –D, ii- C, iii-E, iv-A, v-B
Q9. As per Keynesian economics, the equilibrium level of income is determined at a level
where
(a) aggregate demand is more than 45 degree line
(b) aggregate demand is less than 45 degree line
(c) aggregate demand – curve intersects 45 degree line
(d) all the above
Q10. If MPC=MPS, then value of multiplier is .
(a) infinite (b) one (c) equal to MPC (d) Two
Q11. 'Consumption function curve of an involuntary unemployed workers start from some
positive level on Y-axis even at zero level of Income.' Justify the given statement.
 (3 MARKS)
Q12. State whether the following statements are true or false. Give valid reasons for your
answers.
(i) Unplanned inventories accumulate when planned investment is less than planned
saving.

(ii) Deflationary gap exists when aggregate demand is greater than aggregate supply
at full employment level.

(iii) Average propensity to save can never be negative. (3MARKS)

Q13. (A) ‘India has been dealing with the problem of Deficient Demand, since the
imposition of Covid lockdown in March 2020’. State and discuss any two monetary
policy measures to combat the situation of Deficient Demand in India.
(B) “In an economy, the autonomous consumption is ₹ 100 and Marginal Propensity
to Consume (MPC) is 0.6. If the equilibrium level of Income is ₹ 2,000, then the
autonomous investment is ₹ 300.” Justify the statement with valid calculation.
OR (4MARKS)
(A) On the basis of following schedule, answer given questions :
Income (in Rs crores) 0 50 100 150 200
Savings (in Rs crores) –20 –10 0 30 60
(i) Calculate Marginal Propensity to Save (MPS) at Rs 150 crores level of income.
(ii) What is the value of Autonomous Consumption?
(B) In an economy 75 percent of the increase in income is spent on consumption.
Investment increased by Rs 1,000 crore.
Calculate the total increase in income on the basis of given information.
Q14. Read the following text carefully:
Government of India announced a lockdown for all the economic and non-economic
activities (except emergency ones and selected essential ones) to fight this scare
caused by COVID-19 pandemic. This has caused: • A massive wave of involuntary
unemployment particularly in the unorganized and informal sector. • Fall in demand
of a large number of goods and services. • Shortage of supply of essential (specific to
health and household) and a lot more. To overcome the situation of lack of
consumption demand in the market period, the government is expected to continue
its consumption and investment expenditure. These types of government
expenditures are expected to push the disposable income of the common man. To
ensure a rise in consumption and investment expenditure of the household sector.
The Reserve Bank of India’s survey for the month of July 2020 indicates that
consumer confidence fell to an all-time low. A majority of respondent's reporting
pessimism relating to employment, inflation and income.
(i) in government expenditure may reduce the deflationary gap.
(ii) Private consumption expenditure is directly related to (income / savings )
of the households.
 (iii) How does the lockdown mentioned in the text contribute to the issue of
involuntary unemployment, and what measures could be taken to mitigate this
problem?
Explain the concept of a deflationary gap and how private consumption expenditure
is connected to it? (4 MARKS)
Q15. (a) In an economy S = –50 + 0.5 Y is the saving function (where S = saving and
Y = national income) and investment expenditure is 7,000. Calculate
(i) Equilibrium level of national income.
(ii) Consumption expenditure at equilibrium level of national income.
(b) The Government has raised the exemption limit for the payment of Income tax
from ₹2 lakh to ₹2.5 lakh.” If the situation of deficient demand is prevailing in
the economy, what will be the impact of this action taken by the Government?
(4MARKS)
Q16. (A) "In a hypothetical economy, planned savings fall short of planned investments,
leading to fall in employment and income." Do you agree with the given statement?
Support your answer with a valid explanation.
(B) In an economy, the investment expenditure is increased by Rs. 2,000 crores.
Calculate the total increase in income and consumption expenditure if ratio of
marginal propensity to consume and marginal propensity to save is 4:1.
(6MARKS)

Q17. (a) 'Investment multiplier and Marginal Propensity to Consume are directly related to
each other.' Explain with the help of numerical example.
(b) Draw on a diagram, a straight line savings curve for an economy. From it derive
the consumption curve, explaining the method of derivation. Show a point on the
consumption curve at which average propensity to consume is equal to 1.
(6MARKS)