CBSE Class 12th Economic exam is scheduled for 13th March 2020. In this article we have complied a list of important questions from Chapter 4 of Part B (Macroeconomics): Income Determination. Questions given below are important questions and are expected to be asked in Class 12 Economics board exam 2019-20.
Ques 1 Describe the adjustments that may take place in an economy when ex-ante savings are less than ex-ante investments.
Solution: Ex-ante investments are lesser than ex-ante saving (I < S) means buyers are planning to buy lesser output as to what producers are planning to produce. It will lead to rise in planned inventories above the desired level. As a result the producers will cut down production, leading to reduction of income till savings becomes equal to investments.
Ques 2 Discuss the working of the adjustment mechanism when Aggregate demand is greater than Aggregate supply.
Solution: When Aggregate Demand is greater than Aggregate Supply (AD>AS), buyers are planning to, buy more goods and services than what producers are planning to produce. It will lead to fall in planned inventories below the desired level. The producers in turn will produce more, which will raise the income level i.e. AS, till AD becomes equal to AS.
Ques 3 Suppose in a hypothetical economy, the income rises from ` 5,000 crores to ` 6,000 crores. As a result, the consumption expenditure rises from ` 4,000 crores to ` 4,600 crores. Marginal propensity to consume in such a case would be ________. (Choose
the correct alternative)
Solution: d) 0.6
Ques 4 State and discuss the components of Aggregate Demand in a two sector economy
Solution: Components of Aggregate Demand are:
- Consumption Expenditure(C)
- Investment Expenditure(I)
- Consumption Expenditure(C)–it is that portion of income which is spent on purchase of goods and services by the consumers in an economy during the accounting period.
- Investment Expenditure(I)– The addition to the stock of physical capital and change in inventories of a firm in an economy.
Ques 5 If in an economy :
Change in initial Investments (DI) = ` 500 crores
Marginal Propensity to Save (MPS) = 0.2
Find the values of the following :
(a) Investment multiplier (k)
(b) Change in final income (DY)
Solution: K = (1/MPS)
K= 1/0.2 = 5
ΔY = K(ΔI)
ΔY= 5 x 500 = 2500 crores
Ques 6 Calculate change in final income, if Marginal Propensity to Consume (MPC) is 0·8 and change in initial investment is < 1,000 crores.
Solution: Investment Multiplier (K) = 1/(1-MPC) = 1/(1-0.8)
K = 1/0.2 = 5
Also, K = ΔY/ΔI
5 = ΔY/1000
ΔY = 5,000 crores
Change in final income = 5,000 crores
Ques 7 If Marginal Propensity to Save is 20% and is constant at all levels of income and the autonomous consumption is < 100 crores, construct consumption function of the given hypothetical economy.
Solution: MPS = 20% = 0.2 and ̅ = `100 crore
MPC = 1-MPS= 0.8
C= ̅ + MPC(Y)
C = 100 + 0.8Y
Ques 8 State if the following statement is true or false. Give valid reasons.
In a two-sector economy, if consumption is equal to income, average propensity to save will be zero.
Solution: The given statement is true – if the consumption and income are equal, the savings will be zero. Hence, APS = S/Y = 0/Y = 0
Ques 9 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.
Solution: Given, APC=1, which means that income (Y) is equal to the consumption (C),
Y = 40+0.8Y (since Y=C)
Y – 0.8Y = 40
0.2Y = 40
Y = 200 crores
Ques 10 Which of the two, average propensity to consume or average propensity to save, can be negative and why ?
Solution: APC cannot be negative as even at zero level of income, there will be some minimum amount of consumption (i.e. autonomous consumption) for survival. While, APS can be negative because at zero level of income, there can be dis-savings.