2nd PUC Economics Question Bank Chapter 10 Income Determination

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Karnataka 2nd PUC Economics Question Bank Chapter 10 Income Determination

2nd PUC Economics Income Determination One Mark Questions and Answers

1. Choose The Correct Answer.

Question 1.
Consumption which is independent of income is called
(a) Induced consumption
(b) Autonomous consumption
(c) Wasteful consumption
(d) Past consumption
Answer:
(b) Autonomous consumption

Question 2.
Value of MPC lies between
(a) 1 and 2
(b) 0 and 1
(c) 2 to 4
(d) 0 and 0.5
Answer:
(a) 1 and 2

Question 3.
The point where ex-ante aggregate demand is equal to ex-ante aggregate supply will be
(a) equilibrium
(b) disequilibrium
(c) excess demand
(d) excess Supply
Answers:
(a) equilibrium

Question 4.
Easy availability of credit encourages
(a) saving
(b) Investment
(c) rate of interest
(d) None of these
Answer:
(b) investment

Question 5.
In the situation of excess demand
(a) demand is less than the level of output
(b) demand is more than the level of output
(c) supply is less than the level of output
(d) supply is more than the level of output
Answer:
(b) demand is more than the level of output

Question 6.
What is the value of MPC, when MPS = 0?
(a) 0
(b) 4
(c) 3
(d) 1
Answer:
(d) 1

Question 7.
If MPS is 1, how much is MPC?
(a) 5
(b) 1
(c) 0
(d) 2
Answer:
(c) 0

Question 8.
What is the relationship between MPS and Multiplier?
(a) Positive
(b) Negative
(c) Constant
(d) None of these above
Answer:
(b) Negative

Question 9.
If the marginal propensity to consume is greater than marginal propensity to save the value of the multiples will be
(a) Greater than 2
(b) Equal to 2
(c) Less than 2
(d) Equal to 5
Answer:
(a) Greater than 2

Question 10.
With the increase in income, autonomous expenditure
(a) Increases
(b) Decreases
(c) Remains unaffected
(d) None of the above
Answer:
(c) Remains unaffected

Question 11.
The value of multiplier is
(a) 1/MPC
(b) 1/MPS
(c) 1/1-MPS
(d) 1/MPS – 1
Answer:
(b) 1/MPS

Question 12.
Deficient demand leads to
(a) Full employment equilibrium
(b) Under employment equilibrium
(c) Over full employment equilibrium
(d) None of these.
Answer:
(b) Under employment equilibrium

Question 13.
When economy decides to save the whole of its additional income, the value of investment multiplier will be
(a) 1
(b) 0
(c) 0.1
(d) Infinity
Answer:
(a) 1

Question 14.
Which of the following can be greater than unity:
(a) MPC
(b) APC
(c) APS
(d) MPS
Answer:
(b) APC

Question 15.
When planned savings is less than planned investment it indicates a situation where :
(a) AD<AS
(b) AD = AS
(c) AD>AS
(d) None of these
Answer:
(c) AD > AS

Question 16.
Aggregate demand can be increased by
(a) Increasing bank rate
(b) Selling government securities by reserve bank of India
(c) Increasing cash reserve ratio
(d) None of the above
Answer:
(d) None of the above

Question 17.
Autonomous consumption indicated by in the consumption function
(a) C
(b) AC
(c) S
(d) C
Answer:
(d) C

Question 18.
What can be the minimum value of investment multiplier?
(a) 0
(b) 1
(c) 2
(d) 3
Answer:
(b) 1

Question 19.
If the investment multiplier is 1, what will be the value of Marginal Propensity to consume?
(a) 2
(b) 4
(c) 1
(d) 0
Answer:
(d) 0

Question 20.
is equal to the difference between ‘AD beyond full employment’ and AD at full employment’.
(a) Recession
(b) inflationary gap
(c) deflationary gap
(d) None of these
Answer:
(b) inflationary gap

Question 21.
When does a situation of deficient demand orise in an economy?
(a) AD > AS
(b) S > 1
(c) AD < AS
(d) S < 1
Answer:
(c) AD < AS

II. Fill in the Blanks

1. cY shows the dependence of consumption on …………….
Answer:
Income

2. Savings is that part of income that is ……………
Answer:
Not consumed

3. Average propensity to consume (APC] is the consumption per unit of …………
Answer:
Income

4. ……………..is defined as addition to the stock of physical capital.
Answer:
Investment

5. Size of the multiplier depends on the value of …………….
Answer:
Marginal Propensity to Consume (MPC)

6. y is a positive constant which represents the ………. investment in the economy.
Answer:
Autonomous

7. ……………is the situation under which aggregate demand exceeds aggregate supply at the full
employment level.
Answer:
Excess Demand

8. …………..is the situation under which aggregate demand falls short of aggregate supply at full
employment level.
Answer:
Excess Supply

9. Consumption expenditure is the function of ……………
Answer:
Income.

10. Investment expenditure is a function of ………….
Answer:
Rate of interest.

11. …………….is the money value of total output available in the economy for purchase during a given
period.
Answer:
Aggregate supply

12. Excess demand refers to a situation when ………………….at the full employment level.
Answer:
AD > AS

13. Deficient demand refers to a situation when ………………at the full employment level.
Answer:
AD < AS

14. …………..is the gap denoting the difference between actual AD and the AD required to establish
equilibrium at the full employment.
Answer:
Inflationary gap

15. …………. is the difference between the level of AD required to establish full employmentequilibrium and the actual level of AD.
Answer:
Deflationary gap

III. Match the following:

A	B
1. Savings	(a) APC (Average Propensity to consume)
2. Raw material	(b) C + I + c.Y
3. Consumption per	(c) Intermediate good unit of income
4. Aggregate demand for	(d) Leads to rise in the prices in the long run final goods
5. Excess demand	(e) Y-C

Answers:

(e) Y-C
(c) Intermediate good unit of income
(a) APC (Average Propensity to consume)
(b) C + I + c.Y
(d) Leads to rise in the prices in the long run final goods

IV. Answer the following questions in a sentence/word.

Question 1.
Write the meaning of autonomous consumption.
Answer:
When the level of consumption is independent of income, it is called as autonomous comsumption.

Question 2.
Give the meaning of Marginal propensity to save (MPS).
Answer:
It is the change is savings per unit change is income. It is denoted by s and is equal to 1-c. It implies that s+c = 1

Question 3.
Define Average Propensity to save (APS).
Answer:
It is the savings per unit of income i.e., s/y.

Question 4.
Write the meaning of full employment level of income.
Answer:
Full employment level of income is that level of income where all the factors of production are fully employed in the production process.

Question 5.
Mention two fiscal variables which influence aggregate demand.
Answer:
Consumption and Investment are two fiscal variables which influence aggregate demand

Question 6.
Write the formula of MPC.
Answer:
MPC = AC / Ay = c

2nd PUC Economics Income Determination Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Write the meaning of excess demand and deficient demand.
Answer:
If the equilibrium level of output is less than the full employment of output, then it is called as deficient demand.
If the equilibrium level of output is more than the full employment level, then it is called as excess demand.

Question 2.
Give the meaning of investment multiplier. Write its formula.
Answer:
The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier.

The Investment multiplier = \(\frac{\Delta Y}{\Delta A}=\frac{1}{1-c}=\frac{1}{S}\)

Question 3.
Give the meaning of Paradox of thrift.
Answer:
If all the people of the economy increase the proportion of income they save (i.e. if the mps of the economy increases) the total values of savings in the economy will not increase- it will either decline or remain unchanged. This result is known as the Paradox of Thrift.

Question 4.
What are the factors which cause change in aggregate demand?
Answer:
The factors which cause change is aggregate demand are,
(a) Change is consumption
(b) Change in Investment

2nd PUC Economics Income Determination Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Give the meaning of Aggregate demand function . How can it be obtained graphically?
Answer:
Aggregate Demand function shows the total demand (made up of consumption + investment) at each level of income
Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function.
Here
OM = C̄
OJ = Ī
OL = C̄ + Ī

The aggregate demand function is parallel to the consumption function i.e., they have the same slope c.
It may be noted that this function shows ex-ante demand.

Question 6.
Briefly explain consumption function.
Answer:
A consumption function deccribes the relation between consumption and income.
The simplest consumption function assumes that consumption changes at a constabnt rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption. We can describe this function as:
C = C + cY

The above equation is called the consumption function. Here C is the consumption expenditure by households. This consists of two components autonomous consumption and induced consumption (cY].

Autonomous consumption is denoted by C and shows the consumption which is independent on income. If consumption takes place even when income is zero, it is because of autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income.
When income rises by ₹1. induced consumption rises by MPC i.e. c or marginal propensity to consume.

Question 3.
Explain consumption and investment function with the help of graphs.
Answer:
Consumption function – Graphical Representation
Consumption function where,
C = intercept of the consumption function,
c = slope of consumption function = tan α
Investment Function-Graphical Representation

Ina two sector model, there are two sources of final demand, the first is consumption and the second is investment. The investment function was shown as I = 1 Graphically, this is shown as a horizontal line at a height equal to I above the horizontal axis.

In this model, 1 is autonomous which means, it is the same no matter whatever is the level of income.

2nd PUC Economics Income Determination Six Marks Questions and Answers

VI. Answer the following Questions in 20 Sentences.

Explain the effect of an autonomous change in aggregate demand on income and output.
Ans. Equilibrium level of income depends on aggregate demand. Thus, if aggregate demand changes, the equilibrium level of income also changes. This happens in any one or combination of the following situations:

(1) Change is consumption: this can happen due to (i) change is C (ii) change in c

(2) Change in investment: we have assumed that investment is autonomous. However, it just
means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: when interest is low the investment will be high and if the interest rates are high then the investment will be low.

In the above diagram, when autonomous investment increases, the AD₁ line shifts in parallel upwards and assumes the position AD₂. The value of aggregate demand at output Yx is Yj F, which is greater than the value of output OY₁ = Y₁ Ex by an amount E₁ F. E₁ F measures the amount of excess demand that emerges in the economy as a result of the increase in autonomous expenditure. Thus, E₁ is no longer represents the equilibrium..

To find the new equilibrium in the final goods market we must look for the point where the new aggregate demand line, AD₂, intersects the 45o line. That occurs at point E₂, which is, therefore, the new equilibrium point. The new equilibrium values of output and aggregate demand are Y₂ and AD₂ respectively.

Note that in the new equilibrium, output and aggregate demand have increased by an amount E₁G = E₂G, which is greater than the initial increment in autonomous expenditure, ∆I = E₁F = E₂J.

Question 2.
Explain the supply side of macroeconomic equilibrium.
Answer:
In the first stage of macroeconomics theory, we are taking the price level as fixed.
Here, aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all types available. Whatever is the level of GDP, that much will be supplied and price level has no role to play. This kind of supply situation is shown by a 45° line.
Now, the 45° line has the feature that every point on it has the same horizontal and vertical coordinates.

Suppose, GDP is ₹1000 at point A. The goods supplied is ₹1000 worth. The supply corresponding to pint A is at point B which is obtained at the intersection of the 45° line and the vertical line at A.

Question 3.
Explain the multiplier mechanism.
Answer:
The production of final goods employs factors such as labour, capital, land and organization. In the absence of indirect taxes or subsidies, the total value of the final goods output is distributed among different factors of production- wages, interest, rent, etc. whatever left is profit to the organization. Thus the sum total of aggregates factor payments in the economy, national income, is equal to the aggregate value of the output of final goods, GDP.

In the above example the value of the extra output, 10, is distributed among various factors as factor payments and hence the income of the economy goes up by 10.

When income increases by 10, consumption expenditure goes up by (0.8) 10, since people spend 0,8 (=mpc) fraction of their additional income on consumption.
Hence, in the next round, aggregate demand in the economy goes up by (0.8) 10 and there again emerges an excess demand equal to (0.8)10. Therefore, in the next production cycle, producers increase their planned output further by (0.8)10 to restore equilibrium.

When this extra output is distributed among factors, the income of the economy goes up by (0.8)10 and consumption demand increases further by (0.8)2 10, once again creating excess demand of the same amount.

This process goes on, round after round, with producers increasing their output to clear excess demand in each round and consumers spending a part of their additional income from the extra production on consumption items- thereby creating further excess demand in the next round.

Question 4.
Discuss the Paradox of thrift.
Answer:
If all the people of the economy increase the proportion of income they save (i.e. if the mps of the economy increases) the total values of savings in the economy will not increase- it will either decline or remain unchanged. This result is known as the Paradox of Thrift.
Paradox of thrift states that as people become thriftier they end up saving less or same as before. This result, though sounds apparently impossible, is actually a simple application of the model we have learnt.

Suppose initial equilibrium, = 250. Suddenly MPS increases and as a result MPC decreases from 0.8 to 0.5. At the initial income level AD = Y₁ = 250, this sudden decline of MPC will result in decrease in the consumption spending and hence the AD by an amount = (0.8 – 0.5 ) 250 = 75.

This reduction is regarded as an autonomous reduction in consumption expenditure to the extent of change is MPC.

Now, the AD decreases by 75, it falls short of the output = 250 and emerges an excess supply equal to 75 in the economy.
Stocks are piling up in warehouses and producers will decide to cut the value of production by 75 in the next round of production to restore the equilibrium in the market. That would result in reduction of factor payments in the next round. That is reduction of income by75. This time the consumption decreases by (0.5) 75 and hence the AD. And again excess supply arises. Thus it goes on till infinity.

The total reduction of output is 75 / 1 – 0.5 = 150. The new equilibrium ouput of the economy is Y2= 100. (250- 150).
People are now saving S₂ = Y₂ – C₂ = Y₂ – ( C + c₂. Y₂) = 100 – (40 + 0.5 x 100) = 10.

Y₂ is the income, S₂ is the new saving, C₂ is consumption expenditure. C is autonomous consumption expenditure, c₂ is new MPC and Y₂ is new income.s
Before, when Y₁ was equal to 250, then S₁ was 10, when MPC was 0.8.250 – (40 + 0.8 x 250) = 10 Therefore, total savings in the economy remained unchanged.