Income Determination Important Questions for class 12 economics Aggregate Demand and Supply and Their Components
1. Aggregate Demand (AD)
The sum, total of the demand for all the goods and services in an economy during an accounting year is termed as an Aggregate Demand of an economy. Aggregate Demand of an economy is measured in terms of the (expected) Total Expenditure on all products (goods and services) in an economy during an accounting year.
Aggregate Demand is directly related with income level arid inversely related with general price level.
2. Components of Aggregate Demand
(for a four sector economy)
(i) Household consumption demand or expenditure (C).
(ii) Private investment demand or expenditure (I).
It is affected by:
(a) Rate of interest.
(b) Marginal efficiency of capital.
(iii) Government expenditure or demand for goods and services (G).
It comprises of:
(a) Intermediate consumption of government sector.
(b) Compensation of employees of government sector.
(c) Imports by government sector.
(iv) Net export (X – M).
Thus, Aggregate Demand can, also be written as
Note
It should be remembered that AD is not zero at zero level of income.
AD = C +1+ G + X- M
3. Aggregate Supply (AS) It is the money value of the final goods and services or national product produced in an economy during one year. It is equal to income generated.
4. Components of Aggregate Supply
(i) Consumption expenditure (C) (ii) Saving (S)
Thus, Aggregate Supply can also be written as AD = C + S
5. Propensity to Consume It refers to the ratio between consumption (C) and income (Y). It shows level of consumption (C) with respect to a given level of income (Y).
6. Average Propensity to Consume
The ratio between the consumption expenditure and income is called Average Propensity to Consume.
Average Propensity to Consume (APC) = C/Y
Where, C = Consumption, Y = Income
7. Marginal Propensity to Consume The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.
8. Consumption Function
The functional relationship between the consumption expenditure and the income is known as consumption function.
C = f(Y)
Where, C = Consumption expenditure
Y = Income, or in other words, consumption is a function of income.
9. Algebraic Expression of Consumption Function The algebraic expression of consumption function is given by
10. Propensity to Save It refers to the ratio between savings (S) and income (Y) with respect to given level of income.
11. Average Propensity to Save
The ratio between total savings and the total income in an economy at a given level of income is termed as Average propensity to Save.
Average Propensity to Save (APS) = S/Y
Where, S = Saving
Y= Income
12. Marginal Propensity to Save The ratio between the change in savings with the change in income is known as Marginal Propensity to Save.
13. Saving Function
The functional relationship between saving and income is known as saving function.
S = f(Y)
Where, S = Saving
Y = Income or we can also say that saving is a function of income.
Saving is the excess income which is left with the consumer after paying for all the consumption expenditure.
S=Y-C
Where, terms have their usual meaning.
14. Algebraic Expression of Saving Function The algebraic expression of saving function is given by
15. Relationship between APC and APS
APC + APS =1
or
APC = 1 – APS
and APS = 1 – APC
16. Relationship between MPC and MPS
MPC + MPS = 1
or MPC = 1 – MPS
and MPS = 1 – MPC
17. Investments There are additions made to the present stock of capital. It leads to an increase in capital assets.
18. Autonomous Investment An investment which is not influenced by expected profitability or level of income is called autonomous investment.
19. Induced Investment It is positively related to the level of income in an economy. At higher levels of income, consumption expenditure tends to increase, thereby motivating the producers to increase their investment to be able to meet Higher Demand levels.
Previous Years Examination Questions
1 Mark Questions
1. What is excess of exports of goods over the imports of goods called? (Foreign 2014)
Ans.
It is referred to as net exports.
2. Define Investment. (Compartment 2014)
Ans.
Investments are additions made to the present stock of capital. It leads to an increase in capital assets.
3. Give the meaning of Aggregate Supply. (Foreign 2014)
or
Define Aggregate Supply.
(All India 2009,2008)
Ans.
Aggregate Supply is the money value of the final goods and services or national product produced in an economy during one year. It is equal to income generated.
4. Define Marginal Propensity to Consume. (Delhi 2014; All India 2009)
Ans.
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.
5. Give the meaning of Marginal Propensity to Save. (All India 2010)
or
Define Marginal Propensity to Save.
(All India 2009; Delhi 2008C)
Ans. Marginal Propensity to Save is the ratio of change in saving with the change in income.
‘
6. Give the meaning of Aggregate Demand. (Delhi 2010,2009c)
or
Define Aggregate Demand.
(Delhi 2009c)
Ans.
The sum, total of the demand for all the goods and services in an economy during an accounting year is termed as Aggregate Demand of the economy. Aggregate Demand of an economy is measured in terms of the (expected) Total Expenditure on all products (goods and services) in the economy during an accounting year.
7. Give the meaning of autonomous consumption. (Delhi 2009)
Ans.
The initial or minimum level of consumption done at zero level of income for sustenance is termed as autonomous consumption.
8. What is propensity to consume? (Delhi 2009c)
Ans.
It refers to the ratio between consumption (C) and income (Y). It shows level of consumption (C) with respects to a given level of income (Y).
9. What is consumption function? (Delhi 2008)
Ans.
The functional relationship between consumption expenditure and the income is known as consumption function.
C = f(Y)
Where, C = Consumption expenditure
Y= Income, f = Functional relationship
10. If Marginal Propensity to Save is 3
r
what is the value of Marginal Propensity to
Consume? (All India 2008)
Ans.
Here, Marginal Propensity to Save (MPS) =0.3
Hence, Marginal Propensity to Consume (MPC) =1- MPS =1- 0.3 =0.7
MPC = 0.7
11. Define Average Propensity to Consume. (All India 2008)
Ans.
The ratio between the consumption expenditure and income is known as Average Propensity to Consume.
Average Propensity to Consume (APC) = C/Y
Where, C = Consumption expenditure
Y = Income.
12. If the value of Average Propensity to Save is (-) 0.6, what will be the value of
Average Propensity to Consume?
(All India 2008)
Ans.
Here, Average Propensity to Save (APS) (-) 0.6
Hence, Average Propensity to Consume (APC) = 1 – APS =1 – (- 0.6) =1.6
Average Propensity to Save (APC) =1.6
13. If the value of Average Propensity to Consume is 1.5, what will be the value of
Average Propensity to Save?
(Delhi 2008C)
Ans.
Here, Average Propensity to Consume (APC) = 1.5
Now, we know that
Average Propensity to Save (APS) =1- APC
So, Average Propensity to Save (APS) =1- 1.5 = – 0.5
3 Marks Questions
14. Give the meaning of Average Propensity to Save. What is its relation with Average Propensity to Consume? (Compartment 2014)
Ans.
The ratio between total savings and total income in an economy at a given level of income is termed as ‘Average Propensity to Save’. Symbollically,
Average Propensity to Save (APS) = savings (S)/Income Y)
Relation of Average Propensity to Save with Average Propensity to Consume
APC is the ratio of the total consumption to total income and APS is the ratio of total saving to total income
As we know that, Y = C + S
APC is the ratio of the total consumption to total income and APS is the ratio of total saving to total income
Average Propensity to Save (APS) can have negative value, when the amount of consumption expenditure is more than the income.
15. Find consumption expenditure from the following
Autonomous Consumption =Rs. 100
Marginal Propensity to Consume =0. 70
National Income = Rs. 1000 (Delhi 2012)
1
6. Find consumption expenditure from the following
National Income =Rs. 5000
Autonomous Consumption = Rs. 1000
Marginal Propensity to Consume = 0.8
17. Find National Income from the following
Autonomous Consumption = Rs. 100
Marginal Propensity to Consume =0.60
Investment = Rs. 200
18. Find investment from the following
National Income = Rs. 600 Autonomous Consumption = Rs. 150
Marginal Propensity to Consume =0.70
19. Given that National Income is Rs. 80 crore and consumption expenditure is Rs. 64 crore, find out Average Propensity to Save. When income rises to Rs. 100 crore and consumption expenditure to Rs. 78 crore, what will be the Average Propensity to Consume and Marginal Propensity to Consume? (Delhi 2011)
Ans.
Here, in first condition, Y = Rs. 80 crore
C = Rs. 64 crore
Hence, S = Y – C
= 80 – 64 =Rs. 16 crore
Now, Average Propensity to Save (APS) = S/Y = 16/80 = 0.20
Again, when income and consumption expenditure rises,
Y = Rs. 100 crore
C= Rs. 78 crore
So, Average Propensity to Consume (APC) =C/Y=78/100=0.78
20. If National Income is Rs. 50 crore and saving is Rs. 5 crore, find out Average Propensity to Consume. When income rises to Rs. 60 crore and saving to Rs. 9 crore, what will be the Average Propensity to Consume and Marginal Propensity to Save? (Delhi 2011)
Ans.
Here, in first condition,
Y = Rs. 50 crore
S = Rs. 5 crore
Hence, C = Y – S
= (50 – 5) crore
= 45 crore
Average Propensity to Consume (APC) = C/Y = 45/50 =0.90
Again when income and savings rises,
New Y=Rs. 60 crore
New S = Rs.9 crore
Average propensity to consume (APC) =C/Y
Y-S/Y=60-9/60=0.85
21. If National Income is Rs. 90 crore and consumption expenditure Rs.81 crore, find out Average Propensity to Save. When income rises to Rs. 100 crore and consumption expenditure to Rs. 88 crore, what will be the Marginal Propensity to Consume and Marginal Propensity to Save? (Delhi 2011)
Ans.
Here, in first condition, Y= Rs. 90 crore
C=Rs. 81 crore
Average Propensity to Save (APS) =S/Y
=Y-C/Y=90-81/90=0.10
Again, when the income and consumption expenditure rises,
Y = Rs. 100 crore
C = Rs. 88 crore
22. In an economy, the Marginal Propensity to Consume is 0.75. Investment expenditure in the economy increases by Rs. 75 crore. Calculate the total increase in National Income. (All India 2011)
23. Explain the relationship between Average Propensity to Consume and Average Propensity to Save. Which of these can have a negative value and when? (All India 2011)
Ans.
APC is the ratio of the total consumption to total income and APS is the ratio of total saving to total income
As we know that, Y = C +S
Average Propensity to Save (APS) can have negative value, when the amount of consumption expenditure is more than the income.
24. Explain the meaning of Marginal Propensity to Consume. What is its relationship with Marginal Propensity to Save? (Delhi 2011 c)
Ans.
The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume. Marginal Propensity to Consume tells about the relationship between the change in consumption due to change in National income.
Relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS). The excess of income over consumption is saved, similar is the case for change in income
Hence, MPC + MPS =1
or MPS =1-MPC
and MPS = 1-MPC
25.In an economy, total savings are Rs. 2000 crore and the ratio of Average Propensity to Save and Average Propensity to Consume is 2 : 7. Calculate the level of income in an economy. (All India 201)
26. In an economy, the consumption expenditure is Rs. 8750 crore and the ratio of Average Propensity to Consume and Average Propensity to Save is 7 : 1. Calculate the level of income in the economy. (All India 2010)
27. In an economy, the ratio of Average Propensity to Consume and Average Propensity to Save is 5 : 3. The level of income is Rs. 6000. How much are the savings? Calculate. (Delhi 2010c)
28. Complete the following table (Delhi 2009)
29. Complete the following table (Delhi 2009)
30. Complete the following table
(Delhi 2009)
31. Complete the following table (All India 2009)
–
32. Complete the following table
(All India 2009)
33. Complete the following table
(All India 2009)
4 Marks Questions
34. Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium
National Income = Rs. 2000
Autonomous Consumption Expenditure = Rs. 200
Investment Expenditure = Rs. 100 (All India 2014)
35.Calculate investment expenditure from the following data about an economy which is in equilibrium
National Income = Rs. 1000
Marginal Propensity to Save = 0.20
Autonomous Consumption Expenditure = Rs. 100 (All India 2014)
36. Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium
National Income = Rs. 500
Marginal Propensity to Save = 0.30
Investment Expenditure =Rs. 100 (All India 2014)
37. Calculate investment expenditure from the following data about an economy which is in equilibrium (Delhi 2014)
National Income = Rs. 1000
Marginal Propensity to Save = 0.25
Autonomous Consumption Expenditure = Rs. 200
38. Calculate autonomous consumption expenditure from the following data about an economy which is in equilibrium. (Delhi 2014)
National Income = Rs. 1200
Marginal Propensity to Save = 0.20
Investment expenditure = Rs. 100
–
39. Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium (Delhi 2014)
National Income = Rs. 1500
Autonomous Consumption Expenditure = Rs. 300
Investment Expenditure = Rs. 300
—
40. Calculate ‘autonomous consumption expenditure’ from the following data about an economy which is in equilibrium
National Income = Rs. 900
Marginal Propensity to Save = 0.10
Investment Expenditure =Rs. 80 (Foreign 2014)
Ans.
As we know that, Savings = Investment,
Therefore, Savings = Investment = Rs. 80.
Also, consumption expenditure = Income – Savings Expenditure
= 900 – 80 = Rs. 820
Also, Marginal Propensity to Consume (MPC) = 1 – = 1 – 0.10
= 0.90
Now,
41. Calculate ‘investment expenditure’ from the which is in equilibrium
National Income = Rs. 700
Marginal Propensity to Consume = 0.8
Autonomous Consumption Expenditure = Rs. 70
42.Calculate ‘Marginal Propensity to Consume’ from the following data about an economy which is in equilibrium (Foreign 2014)
National Income = Rs. 800
Autonomous Consumption Expenditure = Rs. 100
Investment Expenditure =Rs.100
Ans.
As we know that, Savings = Investment,
Therefore, Savings = Investment = Rs. 100
Also, Consumption Expenditure = Income – Savings
800 -100 = Rs. 700
43. Outline the steps taken in deriving saving curve from the consumption curve. Use
diagram. (Foreign 2014; Delhi 2012)
or
Explain the steps taken in derivation of saving curve from the consumption curve.
Use diagram. (Delhi 2014; Delhi 2011C)
Ans.
Various steps to be taken for derivation of saving curve from consumption curve are:
6 Marks Questions
44.Outline the steps taken in deriving consumption curve from the saving curve. Use
diagram. (All India 2014; 2012)
or
Explain the steps taken in derivation of consumption curve from savings curve. Use diagram. (All India 2011)
Ans.
Various steps to be taken for derivation of consumption curve from saving curve are
45. Explain the consumption function and saving function.(Foreign 2014)
Ans.
(i) Consumption functions The functional relationship between the consumption expenditure and the income is known as consumption function.
C = f(Y), Where C = Consumption expenditure,
y = Income, and f = Functional relationship.
46. (i) Distinguish between autonomous investment and induced investment.
(ii) On the basis of the following information about an economy, Calculate its equilibrium level of income (Compartment 2014)
Autonomous Consumption = Rs. 100
Marginal Propensity to Consume = 0.75
Investment = Rs. 5000
Ans.
(i) Differece between autonomous investment and induced investment
47. (i) Distinguish between Aggregate Demand and Aggregate Supply.
(ii) From the following data about aneconomy, calculate its equilibrium level of
income.(Compartment 2014)
Marginal Propensity to Consume = 0.8
Investment = Rs. 5000
Autonomous Consumption = Rs. 500
48. Complete the following table (Delhi 2013)
49. Complete the following table (Delhi 2013)
50. From the data given below about an economy, calculate
(i) Investment expenditure (ii) Consumption expenditure.
Equilibrium level of income Rs. 5000
Autonomous consumption Rs. 500
Marginal Propensity to Consume 0.4 (All India 201
3)
51. In an economy, S = -100 + 0.6 Y is the saving function, where S is saving and Y is National Income. If investment expenditure is Rs.1100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of National Income. (Delhi 2013)
Ans.
S = -100 + 0.6 Y
l=*1100
(i) Equilibrium level of National Income
S = l
-100 + 0.6Y = 1100
0.6Y = 1100+100
Y= 1200/0.6=Rs. 2ooo
Y= Rs. 2000
(ii) Consumption expenditure at equilibrium level of National Income
Y= C + l
C= Y- l
C =2000-1100 = Rs. 900
C = Rs. 900
52. C = 100 + 0. AY is the consumption function of an economy, where C is consumption expenditure and Vis National Income. Investment expenditure is Rs. 1100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of National Income. (Delhi 2013)
Ans.
Given, C =100 + 0.4Y
l= Rs. 1100
(i) Equilibrium level of National Income
Y=C + I
Y= 100 + 0.4Y+1100
Y- 4Y = 100+1100
– 0.6Y = 1200
Y= 1200/ 6
Y= Rs. 200
(ii) Consumption expenditure at equilibrium level of income
C = 100 + o.4y
C =100 + 0 .4 x 2000
C = 100 + 800=900
C = Rs.900
53. C= 50+ 0. 5Y is the consumption function of an economy, where C is consumption expenditure and Y is National Income and investment expenditure is Rs. 2000 in an economy. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of National Income. (Delhi 2013)
Ans.
Y = C + l or C+5
Given, C = 50+0.5Y
l=Rs. 2000
(i) Equilibrium level of National Income
Y= C + I
Y= 50 +0.5y + 2000
0.5 Y= 50 + 2000 =2050/0.5
Y = Rs. 4100 (therefore, National Income =Rs. 4100)
(ii) Consumption expenditure at equilibrium level of National Income
C = 50 + 05y
C = 50 +05×4100
C= 50 + 2050
C= Rs. 2100 (therefore, Consumption expenditure =Rs. 2100)
54. Explain consumption function, with the help of a schedule and diagram.
(All India 2011)
Ans.
The functional relationship between the consumption expenditure and the income is known as consumption function.
C = f(Y), Where C = Consumption expenditure,
y = Income, and f = Functional relationship.
Consumption function in terms of an algebraic expression can be written as
The point B represents the break even point, where the consumption expenditure equals the income. To the left of point B, consumption is greater than income and to the right of point B, consumption is less than income
55. Explain saving function with the help of a schedule and diagram.
(All India 2008)
Ans
. The functional relationship between the savings and income is known as saving function.
S = f (Y), Where S = Saving, Y = Income and f = Functional relationship.
Saving function as an algebraic expression, can be written as
Point E represents the break even point where income is equal to consumption hence, saving is equal to zero. To the left of point E, there is negative savings or dissavings (represents the situation when income is less then consumption), to the right of E, there is positive savings (represents the situation when income is greater than consumption).
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