APEEJAY SCHOOL,PANCHSHEEL PARK

CHAPTER – INCOME DETERMINATION

Q1. Explain the two approaches for determination of equilibrium level in an economy with
assumptions.

Q2. Is equilibrium level in economy attained always at full employment? Comment

Q3. Explain the algebric expression relation between MPC also with MPS.

Q4.How will national income change in the following cases:

a. AD > As
b. AS>AD
c. S>I
d. I>S

(A) Fill in the blanks –

1. The relation between average propensity to consume and average propensity to save can be
expressed as…………………
2. IThe value of planned consumption is known as……………. consumption.
3. The value of consumption in an economy would be…………….. if national income of economy
is rupees 16000 crore and the ratio between APC and APS is 5:3.
(B) Fill in the blanks –
1. The total demand for final goods and services in an economy in a given period is known
as________
2. ______ shows functional relationship between consumption and income.
3. MPC and _____ have the value of equal to-------------------------
4. The excess of aggregate demand over aggregate supply at full employment level is
called…….
(C) Fill in the blanks –

Fill in the blanks Questions

Q1. The Value of consumption at a particular level of income is
called…………………………………..
Q2. The value of investment multiplier is …………………………..when marginal propensity
to save is zero.

Q3. Equality between aggregate demand and aggregate supply automatically implies
equality between ……………………..and………………………………….
 Q4. The central bank checks depression in the economy by……………………………..in the
open market.

Q5. The level of income at which consumption is equal to income is termed

as………………………….

Completion type questions

1) The minimum level of consumption at zero level of income is called________.
2) If MPC=0.75 then MPS=_______.
3) In case of deficient demand,RBI________ cash reserve ratio(CRR).
4) At the break even point,_______ is equal to income.

Match the following questions

1. Match the following with appropriate meaning

i. Ex-Post a. Economic activities of the
ii. Ex-Ante government.
b. actual value of aggregate
demand and aggregate
supply in an economy in a
certain year
c. Assumptions of fixed price
of final goods.
d. planned values of
consumption, investment
or aggregate output.
2. Match the following equation with given explanation.
i. C = c (bar) + mpc(y) a. supply function.
Ii. S = -c (bar) + mps(y) b. government
expenditure.
c. consumption function.
d. investment function.

Q1 Match the correct options: i. Change in consumption/change in R

a. APC income
b. APS ii. c/y
iii. s/y
Q2. Match the correct options: i. actual saving U
a. Ex-ante saving ii. planned saving
b. Ex-post saving iii. actual investment
iv. planned investment
Q3. a. Full employment i. 1/1-MPC A/E
b. Investment Multiplier ii. 1/1-MPS
 iii. AD=AS

Q4. Match the correct options: i. Margin requirement A

a. Quantitative instrument ii. Increase in taxes
b. Qualitative instrument iii. bank rate
iv. Decrease in taxes

Q5. Match the correct options: i. marginal propensity to save R

a. APS ii. Marginal propensity to consume
b. MPS iii. Average propensity to save

Q1 Match the correct options: i. aggregate propensity to consume

a. APC ii. Marginal propensity to consume
b. MPC iii. minimum propensity to consume
iv. Average propensity to consume
Q2. Match the correct options: i. change in saving/ change in income
a. Break even point ii. S=Y
b. Slope of saving curve iii. C=y

Q3. a. Cause of Demand Deficient Demand i. Increase in tax rate

b. Cause of Excess Demand ii. Decrease in price level
iii. Increase in consumption
expenditure

Q4. Match the correct options: i. Borrowings from ROW

a. During excess demand situation ii. RBI increases CRR
b. To remove deflationary gap iii. RBI reduces tax rates

Q5. Match the correct options: i. ex ante aggregate demand< ex ante

a. full employment aggregate supply
b. deflationary gap ii. ex ante average demand < ex ante
average supply
iii. voluntary unemployment and
natural rate of unemployment
iv. Involuntary unemployment and
structural unemployment

Q1 Match the correct options: i. C=S

a. Aggregate Demand ii. C+I
b. Aggregate Supply iii. C>I
iv. C+S
Q2. Match the correct options: i. C=Y
a. Average propensity to consume is greater than one ii. C<Y
b. Average propensity to consume is equal than one iii. C>Y
iv. C=0
Q3. a. Marginal Propensity to consume i. C/Y
b. Marginal Propensity to save ii. Change in C/Change in Y
iii. S/Y
 iv. Change in S/Change in Y
Q4. Match the correct options: i. Inflation
a. Excess Demand ii. Recession
b. Deficient Demand iii. Recovery
iv. Deflation

Q5. Match the correct options: i. Aggregate demand equal to

a. Effective Demand Aggregate supply
b. Investment multiplier ii. Ratio of change in income greater
than change in investment
iii. Marginal propensity to save is equal
to marginal propensity to consume
iv. Ratio of change in income to change
in investment

Q1. In the consumption function, 200 + 0.6Y, the value of autonomous saving will be
a) 200 b) -200 c) 0.6 d) 0.4
Q2. At zero level of income consumption is
a) zero b) positive c) negative d) zero or negative
Q3. Which of the following is correct
a) MPC + MPS =1
b) MPC+ MPS >1
c )MPC – MPS = 1
d) MPC + MPS = 0
Q4 An economy is at full employment and AD is greater than AS, what will be the impact on
price level in such an economy?
a) Rise b) Fall c) no change d) both rise and fall
Q5. IF MPC is greater than MPS the value of multiplier is
a) greater than 2 b) less than 2 c) equal to 2 d) equal to 5

Q6 Full employment implies absence of

a) unemployment b) Voulantary unemployment
c) Invoulantry unemployment d) none of these
Q7. Average Propensity to consume is equal to
a) Y/C b) change in Y / change in C c) C/Y d)change in C / change in Y
Q8. In consumptoionfuction C= C + bY, b represents
a) autonomous consumption b) savings
c) MPC d) MPS
Q9. Which of the following statement is true about excess demand at corresponding full
employment level:-
a) situation when AS > AD b) situation when AS < AD
c) situation when AS = AS d) AD is less than or equal to AS
Q10. If MPC = 0, the value of multiplier is -
a) 0 b) 1 c) between 0 and 1 d) Infinity

Q11. When consumption function shoots from Y-axis, it indicates that :-

a) consumption is zero when income is zero
b) saving is negative when income is positive
c)consumption is positive when income is zero
d)saving is positive when income is zero
Q12. Breakeven point occurs when
 a) Y = S b) S = 0 c) C > Y d) Y> C
Q13. Multiplier is the ratio of increase in income to given increase in
a) Supply b) Deamand c) Investment d) Capital structure
Q14. If change in investment is thousand and MPC is 0.8 then income will change by
a) 1250 b) 2500 c) 5000 d) 10000
Q15. When AD is greater than AS, inventories
a) fall b) rise c) do not change d) fall then rise

Q16. Autonomous investment curve is always

a) a vertical staright line.
b) negatively related to income
c) an upward rising staright line
d) always equal to income
Q17. In determination of equilibrium level of income by AD – AS approach, AD is represented by
a) C + S b) C + I c) S + I d) C + Y
Q18. If the MPS is 1, how much will be MPC?
a) 1 b) 0.5 c) 0 d) 0.4
Q19. At full employment level an economy decides to increase government spending. What might
be the probable reasons for such a step?
a) Economy is going through situation of excess demand
b) It is suffering from inflationary gap
c)Economy wants to increase output and employment
d) Economy wants to decrease output and employment
Q20. How are both APC and APS associated with National Income
a) both APC and APS fall with increase in National Income
b) both APC and APS rise with increase in National Income
c) APC falls APS rises with increase in nationalm income
d) APC rises APS falls with increase in nationalm income
Q21. An economy is at full employment and its AS is less than AD. Suggest the most suitable
fiscal policy measure for such and economy
a) raising volume of investment decreasing CRR
b) Raising commercial bank reserves through purchase of securities
c) Reducing taxes to increase household purchasing power
d) Reducing public expenditure to reduce demand.
Q22. An economy is at full employment excess demand situation . Suggest a suitable monetary
policy measure to bring the economy at full employment equilibrium
a) Reducing excess cash reserves with commercial banks
b) Encouraging borrowings of commercial banks
c) enhancing the credit creqating power of commercial banks.
d) increasing excess cash reserves with commercial banks.

True and False

Q1. In situation of inflationary gap, central bank reduces CRR.
Q2. Investment refers to the expenditure incurred on creation of capital assets.
Q3. Excess demand refers to the situation when AD is greater than AS corresponding to
full employment in the economy.
Q4. MPC is the ratio between desired consumption and income.
Q5. Multiplier is directly proportional to MPS.
Q6. Decrease in government spending is a measure to correct excess demand.
Q7. Increase in money supply is a measure to correct excess demand.
Q8. C can exceed Y, but S cannot.
Q9. MPS refers to 1 – MPC.
Q10. Multiplier process assumes the exsistence of excess capacity in the economy.
Q11. An increase in the bank rate makes borrowing costlier for general public.

Q12. RBI is selling government securities to the public to increase income and
employment.

Q13. Equilibrium beyond the full employment level does not lead to rise in output level.
Q14. Saving can never be negative.

Q15. Under the situation of full employment there is no un-utilised capacity in the
economy.

Q16. If the ratio of MPC and MPS is 8 : 2, the value of investment multiplier varies
between zero and infinity.

Q17. As a measure of selective credit control, RBI can instruct commercial banks to
advance more loan to people of income of 5 lakh.

Q18. An increase in bank rate makes borrowings costlier for the general public. (true)
Q19. The rate at which C increases alwasys tends to be lower than the rate at which Y
increases

Q20. Excess demand generates greater employment opportunities in the economy.