Solution

Class 12 - Economics

Macro AD & AS

1. (a) K =
1

1−M PC
1
Explanation: K =   Where 1-MPC= MPS
1−M PC

2. (a) The level of income (Y)

Explanation: Consumption is a function of income.
C=f(Y) and APC=C/Y =f(Y)/Y.
3. (c) 0.25
Explanation: MPS=1-MPC
MPS= 1-0.75.   (given)
         =0.25
4. (b) 1.2
Explanation: APC=C/Y=1200/1000=1.2
5. (a) The value of consumption exceeds the value of income
Explanation: APC=C/Y
APC>1 when C>Y.
6. (d) True.
Explanation: First need of a person is cosumption, when consumption gets over or his basic wants are
satisfied, he starts saving a part. But, saving being function of income, depends on the latter.So, when
income level is low, cosumption is not over, and exceeds income.Thus , leads to negative saving.
7. (a) AD.
Explanation: Because , AD=C+I+G+(X-M). So, clearly AD is a function of G. 
8. (a) 5
Explanation: K=1/1-mpc
   = 1/1-0.8
   =1/0.2
    =5
9. (a) S = - a + (1 - b) Y
Explanation: S = - a + (1 - b) Y
10. (c) Autonomous savings.
Explanation: 'a' is constant which implies that this saving takes place even when income is zero and is
independent of the level of income.So, 'a' denotes autonomous savings.
11. (c) C = a + by
Explanation: Propensity to consume in economics means the tendency of consumers to spend income.
Since, tendency is either of autonomous consumption or induced consumption, denoted by 'a' and 'bY'
respectively
12. (a) The slope of consumption
Explanation: 'b' measures rate of change of consumption with respect to change in income.
13. (b) ‘a’ is called intercept
Explanation: The given function is in slope intercept form as depicted below:
Slope-Intercept Form
y = mx + b
↑ ↑
y−inte rc e pt
slope

14. (d) Savings= income.

Explanation: Given, APS=1
    But, APS=S/Y

1/5
Jagannath Sen- Cont 9609471252
 So,        S/Y=1
             S=Y.
15. (b) 1000
Explanation: Here, K =
1
=
1
=
1
= 5
1−M PC 1−0.8 0.2
1
Now, K = ΔS

Δy

Δy
= 5
Δs

Δy = 5Δs  --- (i)

Δy
Also,  = 5
ΔS

Δy = 5ΔI  ---- (ii)

from (i) and (ii) we get,
5Δs = 5ΔI

Δs = ΔI

Δs = 1000  (given ΔI = 1000 )

16. (b) MPS
Explanation: (1-b)Y denotes induced savings where (1-b) denotes MPS. MPS is a part of saving function
whereas MPC is a part of consumption function.
17. (c) Algebraic function of the level of Savings

Explanation:

18. (d) Increase in savings per unit increase in the income.

Explanation: Slope of saving function implies rate of change of saving with respect to income.
19. (c) Infinity
Explanation: Since, multiplier is a function of MPC, so when MPC is maximum, K must be maximum. 
1
Thus, K =
1−1
= infinity.

20. (c) Negative savings

Explanation: '-a' denotes autonomous savings.So, these are done at zero level of income.
21. (b) (1-b) i.e. MPS is positive
Explanation: b stands for MPC. So, when b is less than 1,evidently 1-b is positive or 1-b>0
22. (d) Consumption expenditure
Explanation: It is a linear consumption function where  'C' represents  consumption  expenditure.
23. (b) Rs. 5000
Explanation: K=1/1-MPC=1/1-0.8=1/0.2=5.
It means that income will multiply five times the initial income.
So, New income= 5×1000=5000.
24. (a) Change in the income to the change in the investment
Explanation:  Investment multiplier implies that investment multiplies income and the extent of increase
in income is given by K.
ΔY
K =  or  K × ΔI = ΔY
ΔI

Where K is multiplier,
25. (c) APS will be negative
Explanation: APC=1-APS

2/5
Jagannath Sen- Cont 9609471252
 APC=1-(-APS)
APC=1+APS
So, APC>1 when APS is negative.
 
26. (b) Disposable income
Explanation: 'bY' denotes induced consumption where 'Y' denotes disposable income as consumption is
not determined by taxes.
27. (b) 4000
Explanation: Here, MPC = 0.8
1 1
K = = = 5
1−0.8 0.2
Δy
= 5
ΔI

Δy = 5ΔI  --- (i)

1
Also,  ΔC
= 5
1−
Δy

Δy
= 5
Δy−Δc

Δy = 5(Δy − Δc)  --- (ii)

from (i) and (ii) we get,
5ΔI = 5(Δy − Δc)

1000 = 5000 − Δc  --- using (i)

Δc = 4000

28. (a) Disposable income.

Explanation: Because savings are started when first taxes are deducted from income.
29. (d) The level of income (Y)
Explanation: Saving is a function of income.
S=f(Y).
So, APS=S/Y=f(Y)/Y.
30. (d) MPC
Explanation: Since, MPS =1-b =1-MPC.
Hence, 'b' must be MPC.
 
31. (a) 1.0
Explanation: Since , APC=C/Y=1000/1000=1
 Thus, APS=1-APC=1-1=0.
Now, APC+APS=1+0=1.
32. (d) MPS
Explanation: Since, b is called MPC 
MPS=1-MPC=1-b.
33. (d) MPC
Explanation: Since, we know that
C = a + by --- (i)
dc
also,  = MPC
dy

Diffenciating (i) w.r.t y, we get

dc
= b
dy

b = MPC
34. (b) 0.0
Explanation: APC=C/Y=1000/1000=1
Thus, APS= 1-APC=1-1=0.
35. (c) MPC
Explanation: We know that multiplier is a function of MPC

3/5
Jagannath Sen- Cont 9609471252
 1
K =
1−M PC

36. (a) other things remaining equal

Explanation: other things remaining equal
37. (d) True.
Explanation: Value of APS is negative when consumption expenditure is greater than income.For example
, if income = Rs.1000, consumption = 1200.
Then, saving = - 200. (negative saving)
APS = - 200/1000= - 0.2
38. (d) ΔY
ΔC
Explanation: Since, we know that MPC is given by M P C =
ΔY
1
Now, MPC is a function of change of consumption and multiplier is a function of MPC as K =
1−M PC

So, change in consumption would lead to change in income via multiplier process.
39. (c) APS =0
Explanation: APS=0 , implies that all income is consumed
Thus, APC=Y/Y=1
As , Y=C.(all income is consumed
40. (c) Autonomous consumption expenditure
Explanation: Here, 'a' is a constant which denotes autonomous consumption.This consumption is not
induced by income changes.
41. (c) True.
Explanation: We call f(x) an increasing function of x, as x increases , f(x) also increases. 
We know that saving is a function of income.So, as income increases saving also increases.
Thus, saving is an increasing function of income.
42. (a) MPC
Explanation: 'bY 'denotes induced consumption where 'b' denotes marginal propensity to consume.
43. (b) S= -a+(1-b)Y
Explanation: S=-b+(1-b)Y, where 1-b implies marginal propensity to save.
1
44. (b)
M PS
1
Explanation:
M PS

45. (c) C = Y
Explanation: See the figure below:

4/5
Jagannath Sen- Cont 9609471252
46. (b) Level of savings
Explanation: The given function is an algebraic linear function of savings where S denotes level of savings,
having two parts :autonomous savings and induced savings.
47. (b) 1.0
Explanation: Referring to the formula of investment multiplier below, if MPS=1, K=1. It means when
consumption is zero or all income is saved, then there is no investment hence ,no change in income.
1 1 1
K = = =
dC 1−M PC 1−M PS
1−
dY

48. (b) ex post measures

Explanation: ex post measures
49. (b) The value of consumption exceeds the value of income
Explanation: When consumption expenditure exceeds income,we have negative savings.
Thus, APS being function of saving is negative.
50. (b) True.
Explanation: Yes, APC can be greater than 1.It happens in such situations where the level of income is so
low that cosumption is greater than income.
APC=C/Y
APC>1 when C>Y.

5/5
Jagannath Sen- Cont 9609471252