Determination of Income and Employment quiz

In a two-sector economy, aggregate demand is:

If MPC = 0.8, the value of the investment multiplier is:

The sum of MPC and MPS is always:

At the break-even point:

APC can be greater than one when:

Deficient demand leads to:

If planned investment exceeds planned saving, income will:

The minimum value of the investment multiplier is:

Which measure can correct excess demand?

The consumption curve starts from a positive point on the Y-axis because of:

Distinguish between average propensity to save and marginal propensity to save. (2 marks)

Why is the 45 degree line used in income determination diagrams? (2 marks)

What is meant by excess demand? State one effect of it. (2 marks)

Explain the relationship between the investment multiplier and MPS. (2 marks)

What is meant by ex-ante saving and ex-post saving? (2 marks)

Why does APC fall as income rises? (2 marks)

What is the deflationary gap? (2 marks)

Explain how the cash reserve ratio can be used to correct deficient demand. (2 marks)

Why is investment taken as autonomous in the simple Keynesian model? (2 marks)

State the meaning of effective demand. (2 marks)

Investment in an economy increases by Rs 100 crore, and as a result income increases from Rs 1,000 crore to Rs 1,500 crore. Calculate the multiplier and the MPC. (3 marks)

At an income of Rs 500 crore, APC is 0.8. Calculate consumption, saving and APS at this level of income. (3 marks)

In an economy, C = 50 + 0.5Y and I = 25 (Rs crore). Calculate the equilibrium level of income, consumption and saving. (3 marks)

The MPS in an economy is 0.25. By how much must investment rise to increase national income by Rs 400 crore? (3 marks)

Autonomous consumption is Rs 40 crore, MPC is 0.6 and investment is Rs 60 crore. Calculate equilibrium income. If actual output is Rs 300 crore, calculate aggregate demand at this output and the unplanned change in inventories. (3 marks)

Read the passage and answer the questions. During a recession, a country's factories were running at 60% capacity and many workers were laid off. The government announced a Rs 20,000 crore programme to build roads, and economists estimated the MPC at 0.75. (i) Identify the situation in the economy. (ii) Calculate the expected increase in national income. (iii) Explain how the multiplier works in this case. (5 marks)

Read the passage and answer the questions. In an economy, aggregate demand rose sharply because of easy credit, but output could not increase since all resources were already fully employed. Prices of goods rose by 9% in a year. (i) Identify the situation. (ii) Name the gap created. (iii) Suggest two monetary measures to correct it. (5 marks)

Read the passage and answer the questions. A survey of households showed that families with monthly income of Rs 20,000 consumed Rs 18,000, while families with Rs 40,000 consumed Rs 32,000. (i) Calculate APC at both income levels. (ii) Calculate the MPC between these levels. (iii) What does the result suggest about consumption behaviour? (5 marks)

Read the passage and answer the questions. A retailer found that his unsold stock of goods kept piling up over three months because households were buying less than producers planned to sell. (i) What does this show about planned saving and planned investment? (ii) How will producers respond? (iii) What will happen to equilibrium income? (5 marks)

Read the passage and answer the questions. Encouraged by a campaign, all households in an economy decided to save a larger share of their income. Surprisingly, at the end of the year total saving did not increase and national income fell. (i) Name this phenomenon. (ii) Explain why it happens. (iii) Draw a simple diagram to support your answer. (5 marks)

Explain the determination of equilibrium income using the saving-investment approach with a schedule and diagram. (6 marks)

Derive the consumption and saving curves from a consumption schedule, explain APC, MPC, APS and MPS, and show the relationship between them with diagrams. (6 marks)

Explain excess demand and deficient demand with diagrams. Discuss their impact on output, employment and prices. (6 marks)

Explain the investment multiplier, derive k = 1/(1 - MPC), and show with a diagram how an increase in investment shifts AD and raises equilibrium income. (6 marks)

Discuss fiscal and monetary measures (government spending, taxes, bank rate, open market operations, CRR, margin requirements) to correct deficient demand, drawing a diagram for one of them. (6 marks)