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Determination of Income and Employment

NCERT Class 12 · Economics Based on NCERT Class 12 Economics textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains how national income is determined in the short run using the Keynesian model, assuming fixed prices and a constant rate of interest. It introduces the concepts of aggregate demand and its components—consumption and investment—and shows how equilibrium income is achieved when planned aggregate demand equals planned aggregate supply. The one big idea a student must walk away with is that in the short run, output and employment are determined by effective demand, and an initial change in autonomous expenditure leads to a multiplied change in equilibrium income through the multiplier process.
Key Concepts (17)
Ex ante
Planned or intended values of variables such as consumption, investment, or output, determined before the actual economic activity takes place.
e.g. A producer plans to add Rs 100 worth of goods to inventory by year-end; this planned addition is ex ante investment of Rs 100.
Ex post
Actual or realized values of variables as measured after the economic activity has occurred.
e.g. If the producer ends up adding only Rs 70 to inventory due to higher sales, the actual addition is ex post investment of Rs 70.
Consumption function
A mathematical relationship showing the level of consumption expenditure at different levels of income, typically written as C = C̅ + cY, where C̅ is autonomous consumption and c is the marginal propensity to consume.
e.g. For Imagenia, C = 100 + 0.8Y means even with zero income, consumption is Rs 100, and for every Rs 100 increase in income, consumption rises by Rs 80.
Autonomous consumption
The level of consumption that occurs even when income is zero, independent of the level of income.
e.g. In the consumption function C = 100 + 0.8Y, the autonomous consumption is Rs 100.
Induced consumption
The part of consumption that varies with income, given by cY in the consumption function.
e.g. In C = 100 + 0.8Y, if Y = 1000, induced consumption is 0.8 × 1000 = Rs 800.
Marginal propensity to consume (MPC)
The change in consumption per unit change in income, denoted by c, calculated as ΔC/ΔY.
e.g. If income rises by Rs 100 and consumption rises by Rs 80, MPC = 0.8.
Marginal propensity to save (MPS)
The change in savings per unit change in income, denoted by s, equal to 1 - MPC.
e.g. If MPC = 0.8, then MPS = 1 - 0.8 = 0.2.
Average propensity to consume (APC)
Consumption per unit of income, calculated as C/Y.
e.g. If consumption is Rs 900 and income is Rs 1000, APC = 0.9.
Average propensity to save (APS)
Savings per unit of income, calculated as S/Y.
e.g. If savings is Rs 100 and income is Rs 1000, APS = 0.1.
Autonomous investment
Investment that does not depend on the level of income; it is treated as a constant in the simple Keynesian model.
e.g. In the equation I = I̅, I̅ is autonomous investment, e.g., Rs 10 crores regardless of income.
Aggregate demand (AD)
The total planned expenditure on final goods and services in the economy, equal to consumption plus investment (and government spending, if included).
e.g. In a two-sector model, AD = C + I = C̅ + I̅ + cY.
Effective demand principle
The principle that, in the short run with fixed prices and perfectly elastic aggregate supply, the level of output and employment is determined solely by the level of aggregate demand.
e.g. If aggregate demand is Rs 500 crores, output will be Rs 500 crores, even if the economy could produce more.
Paradox of thrift
The phenomenon where an increase in the economy's marginal propensity to save (thriftiness) leads to no change or a decline in total savings, because the fall in aggregate demand reduces income and output.
e.g. If MPC falls from 0.8 to 0.5, equilibrium income falls from 250 to 100, but total savings remain unchanged at 10.
Full employment level of income
The level of income at which all factors of production are fully employed in the production process.
e.g. If the full employment output is 300 but equilibrium output is 250, there is deficient demand and unemployment.
Deficient demand
A situation where equilibrium output is less than the full employment level of output due to insufficient aggregate demand.
e.g. If full employment output is 300 but AD is only enough for 250, the economy faces deficient demand.
Excess demand
A situation where equilibrium output is greater than the full employment level of output due to aggregate demand exceeding full employment output.
e.g. If full employment output is 300 but AD pushes equilibrium to 350, there is excess demand leading to inflation.
Unintended accumulation of inventories
When actual sales are less than planned sales, causing an unplanned increase in inventories, which is a form of ex post investment.
e.g. If a firm planned to sell 100 units but sold only 80, the extra 20 units remain as unintended inventory accumulation.
Formulas & Equations (11)
C = C̅ + cY
Reads as: Consumption equals autonomous consumption plus marginal propensity to consume times income
Variables: C = consumption expenditure; C̅ = autonomous consumption; c = marginal propensity to consume (MPC); Y = income
Use when: Calculating consumption at a given level of income, or deriving aggregate demand
⚠ Students often forget that C̅ is a constant and treat it as variable, or confuse c with the slope of the consumption function when it is the same.
S = Y - C
Reads as: Savings equals income minus consumption
Variables: S = savings; Y = income; C = consumption
Use when: Finding savings from given income and consumption data
⚠ Students sometimes write S = C - Y, which is incorrect.
MPC = c = ΔC/ΔY
Reads as: Marginal propensity to consume equals change in consumption divided by change in income
Variables: MPC = marginal propensity to consume; ΔC = change in consumption; ΔY = change in income
Use when: Calculating MPC from changes in consumption and income
⚠ Using total consumption and total income instead of changes (Δ).
MPS = s = ΔS/ΔY
Reads as: Marginal propensity to save equals change in savings divided by change in income
Variables: MPS = marginal propensity to save; ΔS = change in savings; ΔY = change in income
Use when: Calculating MPS from changes in savings and income
⚠ Forgetting that MPS = 1 - MPC, and trying to calculate it directly without changes.
c + s = 1
Reads as: Marginal propensity to consume plus marginal propensity to save equals one
Variables: c = MPC; s = MPS
Use when: Finding one propensity when the other is known
⚠ Assuming c + s = 0 or some other value.
APC = C/Y
Reads as: Average propensity to consume equals consumption divided by income
Variables: APC = average propensity to consume; C = consumption; Y = income
Use when: Calculating the proportion of income spent on consumption at a given income level
⚠ Confusing APC with MPC; APC is a ratio at a point, MPC is a rate of change.
APS = S/Y
Reads as: Average propensity to save equals savings divided by income
Variables: APS = average propensity to save; S = savings; Y = income
Use when: Calculating the proportion of income saved at a given income level
⚠ Forgetting that APC + APS = 1.
AD = C̅ + I̅ + cY
Reads as: Aggregate demand equals autonomous consumption plus autonomous investment plus marginal propensity to consume times income
Variables: AD = aggregate demand; C̅ = autonomous consumption; I̅ = autonomous investment; c = MPC; Y = income
Use when: Finding aggregate demand at any income level in a two-sector model
⚠ Omitting the autonomous components and writing AD = cY only.
Y = A̅ + cY
Reads as: Equilibrium income equals total autonomous expenditure plus marginal propensity to consume times income
Variables: Y = equilibrium income; A̅ = C̅ + I̅ (total autonomous expenditure); c = MPC
Use when: Setting up the equilibrium condition in the goods market
⚠ Forgetting that this is an equilibrium condition, not an identity.
Y* = A̅ / (1 - c)
Reads as: Equilibrium income equals total autonomous expenditure divided by one minus the marginal propensity to consume
Variables: Y* = equilibrium income; A̅ = total autonomous expenditure; c = MPC
Use when: Calculating the equilibrium level of income given autonomous expenditure and MPC
⚠ Writing the denominator as (1 - c) but forgetting that c must be less than 1 for a positive multiplier.
Multiplier (k) = ΔY/ΔA̅ = 1/(1 - c) = 1/s
Reads as: The investment multiplier equals the change in income divided by the change in autonomous expenditure, which equals one divided by one minus MPC, or one divided by MPS
Variables: k = multiplier; ΔY = change in equilibrium income; ΔA̅ = change in autonomous expenditure; c = MPC; s = MPS
Use when: Calculating the total change in income resulting from a change in autonomous expenditure
⚠ Using ΔY/ΔA̅ = 1/(1 - c) but forgetting that the multiplier works only when there is spare capacity.
How It Works
Determination of equilibrium income in a two-sector model (graphical method)
  1. Draw the 45° line representing aggregate supply (AS), where every point has equal horizontal and vertical coordinates (Y = AS).
  2. Plot the consumption function C = C̅ + cY with intercept C̅ and slope c.
  3. Add the autonomous investment I̅ vertically to the consumption function to get the aggregate demand line AD = C̅ + I̅ + cY.
  4. The equilibrium point E is where the AD line intersects the 45° line, giving equilibrium income Y*.
  5. At any income below Y*, AD > AS, leading to unintended inventory depletion and expansion of output.
  6. At any income above Y*, AD < AS, leading to unintended inventory accumulation and contraction of output.
💡 The 45° line is not a demand or supply curve in the usual sense; it is a reference line where planned output equals planned expenditure.
Determination of equilibrium income in a two-sector model (algebraic method)
  1. Write the equilibrium condition: ex ante aggregate demand = ex ante aggregate supply, i.e., AD = Y.
  2. Substitute AD = C̅ + I̅ + cY.
  3. Set Y = C̅ + I̅ + cY.
  4. Rearrange to get Y - cY = C̅ + I̅, or Y(1 - c) = A̅.
  5. Solve for Y: Y* = A̅ / (1 - c).
💡 This is a planned equilibrium; actual (ex post) output always equals actual expenditure due to inventory adjustments.
The multiplier mechanism
  1. An initial increase in autonomous expenditure (ΔA̅) raises aggregate demand and creates excess demand.
  2. Producers increase output by ΔA̅ to meet the excess demand, which increases income by the same amount.
  3. With higher income, consumption rises by c × ΔA̅ (induced consumption), creating further excess demand.
  4. Producers again increase output by c × ΔA̅, raising income further.
  5. This process continues in successive rounds: ΔA̅, cΔA̅, c²ΔA̅, c³ΔA̅, ...
  6. The total increase in income is the sum of the infinite geometric series: ΔY = ΔA̅ / (1 - c).
💡 The multiplier works only if there are unemployed resources so that output can increase without raising prices.
Paradox of thrift
  1. Initially, the economy is at equilibrium with a given MPC (e.g., 0.8) and income Y*1.
  2. People become more thrifty, increasing MPS (decreasing MPC, e.g., to 0.5).
  3. At the initial income, the lower MPC reduces consumption and aggregate demand, creating excess supply.
  4. Producers cut output, reducing income, which further reduces consumption and demand in a multiplier process.
  5. The new equilibrium income Y*2 is lower (e.g., from 250 to 100).
  6. Total savings at the new equilibrium are calculated and found to be unchanged (or even lower) than before.
💡 The paradox shows that individual attempts to save more can lead to no increase in aggregate savings because the fall in income reduces the ability to save.
Exam Traps — Don't Make These Mistakes
⚠ Confusing ex ante and ex post in equilibrium
✗ In equilibrium, ex ante aggregate demand equals ex post aggregate demand.
→ Equilibrium is defined by equality of ex ante (planned) aggregate demand and ex ante aggregate supply. Ex post values always equal due to accounting identity, but ex ante equality is the condition for equilibrium.
✓ In equilibrium, ex ante aggregate demand equals ex ante aggregate supply. Ex post values are always equal by definition.
⚠ Using total values instead of changes for MPC
✗ MPC = C/Y.
→ MPC is the change in consumption per unit change in income (ΔC/ΔY), not the average (C/Y). Using total values gives APC, not MPC.
✓ MPC = ΔC/ΔY, the rate of change of consumption with respect to income.
⚠ Misinterpreting the 45° line
✗ The 45° line represents the aggregate demand curve.
→ The 45° line represents aggregate supply (or the line where Y = AS). Aggregate demand is a separate line with intercept and slope c.
✓ The 45° line is the aggregate supply line where every point has equal horizontal and vertical coordinates, representing Y = AS.
⚠ Forgetting that the multiplier applies only to autonomous changes
✗ A change in induced consumption will also have a multiplier effect.
→ The multiplier is defined as ΔY/ΔA̅, where ΔA̅ is a change in autonomous expenditure. Induced consumption is part of the multiplier process, not an autonomous change that triggers it.
✓ The multiplier effect is triggered only by a change in autonomous expenditure (e.g., ΔI̅ or ΔC̅). Induced consumption is the channel through which the multiplier works.
⚠ Thinking the paradox of thrift means savings always decrease
✗ The paradox of thrift states that if people save more, total savings in the economy will decrease.
→ The paradox states that total savings will either decline or remain unchanged. In the NCERT example, savings remained unchanged at 10 even after the MPC fell.
✓ The paradox of thrift states that an increase in thriftiness (higher MPS) may lead to no change or a decline in total savings, because the fall in income offsets the higher saving rate.
Compare & Contrast
Timing and nature of measurement
Ex ante
Ex post
Ex ante refers to planned or intended values before the economic activity occurs, while ex post refers to actual realized values after the activity.
What they measure
MPC (Marginal Propensity to Consume)
APC (Average Propensity to Consume)
MPC measures the change in consumption per unit change in income (ΔC/ΔY), while APC measures total consumption per unit of income at a given level (C/Y).
Dependence on income
Autonomous consumption
Induced consumption
Autonomous consumption is independent of income (occurs even at zero income), while induced consumption varies with income (cY).
Relation to full employment output
Deficient demand
Excess demand
Deficient demand occurs when equilibrium output is less than full employment output, leading to unemployment; excess demand occurs when equilibrium output exceeds full employment output, leading to inflation.
Exam Focus
Marks pattern: 2 MCQs (1 mark each), 1 short answer (3 marks), 1 long answer (5 or 6 marks). Total approximately 10-11 marks.
Most asked: Derivation of equilibrium income using AD = AS approach (both algebraic and graphical) · Calculation of multiplier and its application · Paradox of thrift — explanation and numerical example · Consumption function and its components (autonomous and induced) · Marginal and average propensities to consume and save
Don't skip: Numerical problem on equilibrium income and multiplier (5-6 marks); Explain the paradox of thrift with a numerical example (5-6 marks); Derive the autonomous expenditure multiplier (3-5 marks)
One-Line Revision (read aloud before the exam)
  1. Ex ante means planned; ex post means actual.
  2. Consumption function: C = C̅ + cY, where C̅ is autonomous consumption and c is MPC.
  3. MPC = ΔC/ΔY, and it lies between 0 and 1.
  4. MPS = ΔS/ΔY, and MPC + MPS = 1.
  5. APC = C/Y, APS = S/Y, and APC + APS = 1.
  6. Autonomous investment is independent of income; I = I̅.
  7. Aggregate demand in a two-sector model: AD = C̅ + I̅ + cY.
  8. Equilibrium condition: Y = AD, giving Y* = A̅ / (1 - c).
  9. The investment multiplier k = 1/(1 - c) = 1/s.
  10. The multiplier process: an initial change in autonomous expenditure leads to a larger change in income through successive rounds of induced consumption.
  11. The paradox of thrift: an increase in thriftiness may leave total savings unchanged or reduced.
  12. Effective demand principle: output is determined by aggregate demand in the short run with fixed prices.
  13. Deficient demand leads to unemployment; excess demand leads to inflation.
  14. Unintended inventory accumulation occurs when AD < AS; unintended inventory depletion occurs when AD > AS.
  15. The 45° line represents aggregate supply where Y = AS.

MCQs — 10 Questions with Answers

Q1. In the consumption function C = 150 + 0.6Y, the marginal propensity to consume is:

  • A. 0.6 ✓
  • B. 150
  • C. 0.4
  • D. 1.0

Answer: A — In C = C̄ + cY, the coefficient c of income Y is MPC, which equals 0.6 in this function.

Q2. If MPC = 0.8, what is the investment multiplier?

  • A. 1.25
  • B. 5 ✓
  • C. 0.8
  • D. 0.2

Answer: B — k = 1/(1 − MPC) = 1/(1 − 0.8) = 1/0.2 = 5; this multiplier shows that each Re 1 increase in investment raises income by Rs 5.

Q3. Autonomous consumption refers to:

  • A. Consumption that depends on income level
  • B. Consumption that occurs even when income is zero ✓
  • C. The marginal change in consumption
  • D. Total consumption in an economy

Answer: B — Autonomous consumption (C̄) is independent of income and represents consumption financed by past savings or borrowing when current income is zero.

Q4. An economy has C = 100 + 0.75Y and planned investment I = 200. At equilibrium income of Rs 1200 crore, if investment rises to Rs 250 crore, the new equilibrium income is:

  • A. Rs 1300 crore
  • B. Rs 1400 crore ✓
  • C. Rs 1600 crore
  • D. Rs 2000 crore

Answer: B — Multiplier k = 1/(1 − 0.75) = 4; increase in investment = 250 − 200 = 50; ΔY = k × ΔI = 4 × 50 = 200; new income = 1200 + 200 = Rs 1400 crore.

Q5. Which of the following statements about MPC and MPS is INCORRECT?

  • A. MPC + MPS = 1
  • B. MPC measures the change in consumption per unit change in income
  • C. MPS can be greater than 1 ✓
  • D. Both MPC and MPS are always positive

Answer: C — Since MPC + MPS = 1 and both are positive, neither can exceed 1; MPS cannot be greater than 1 as it is the complement of MPC.

Q6. Ex-ante investment differs from ex-post investment when:

  • A. Income is zero
  • B. Unplanned inventory changes occur due to demand fluctuations ✓
  • C. MPC is constant
  • D. Autonomous consumption is high

Answer: B — Ex-ante (planned) investment equals ex-post (actual) only when production matches expectations; unplanned inventory change (e.g. unsold stock) causes them to differ.

Q7. In a two-sector Keynesian model, equilibrium is established when:

  • A. Aggregate supply equals zero
  • B. Planned aggregate demand equals actual output (aggregate supply) ✓
  • C. Investment equals consumption
  • D. MPC equals 1

Answer: B — Equilibrium occurs where Y = AD (C + I), meaning planned spending matches actual production, leaving no unplanned inventory accumulation or depletion.

Q8. A deflationary gap is best described as a situation where:

  • A. Aggregate demand exceeds full employment output
  • B. Aggregate demand falls short of full employment output, causing unemployment ✓
  • C. Price level is constantly falling
  • D. Savings exceed investment by a large margin

Answer: B — A deflationary gap occurs when actual AD < full employment AD, leaving resources unemployed; it signals need for expansionary policy (higher G or lower taxes).

Q9. If an economy is in an inflationary gap and the government increases taxes, the likely effect is:

  • A. Aggregate demand increases further
  • B. Consumption falls, aggregate demand decreases, bringing output toward full employment ✓
  • C. Investment increases to compensate
  • D. Employment rises due to higher tax revenue

Answer: B — Higher taxes reduce disposable income, lowering consumption (C = C̄ + cY), which decreases aggregate demand and cools excess demand in an inflationary gap.

Q10. In the consumption function C = 200 + 0.5Y, if income increases from Rs 1000 to Rs 1200, the increase in consumption is:

  • A. Rs 100 ✓
  • B. Rs 200
  • C. Rs 400
  • D. Rs 500

Answer: A — Change in consumption = MPC × Change in income = 0.5 × (1200 − 1000) = 0.5 × 200 = Rs 100.

Flashcards

What does 'ex-ante' mean in macroeconomics?

Ex-ante refers to planned or intended values of economic variables (like consumption or investment) before they actually occur.

Define marginal propensity to consume (MPC).

MPC is the change in consumption per unit change in income, expressed as c = ΔC/ΔY, and always lies between 0 and 1.

If MPC = 0.75, what is MPS?

MPS = 1 − MPC = 1 − 0.75 = 0.25, because income is either consumed or saved.

What is the consumption function equation?

C = C̄ + cY, where C̄ is autonomous consumption, c is MPC, and Y is income.

State the formula for investment multiplier.

k = 1/(1 − MPC) or k = 1/MPS; it shows how many times an initial increase in investment gets magnified in total income.

What is aggregate demand in the Keynesian model?

Aggregate demand (AD) = Consumption (C) + Investment (I), representing total planned spending on final goods.

Define autonomous consumption.

Autonomous consumption (C̄) is the level of consumption that occurs even when income is zero, typically financed by past savings or borrowing.

At income equilibrium, how does planned equal actual investment?

At equilibrium output, aggregate demand equals aggregate supply, so planned spending matches actual output, leaving no unplanned inventory change.

What is a deflationary gap?

A deflationary gap occurs when actual aggregate demand falls short of the aggregate demand needed for full employment, resulting in unemployment and output below potential.

Name one policy tool to close an inflationary gap.

Reduce government spending or increase taxes to lower aggregate demand and bring output back to full employment level.

Important Board Questions

Define marginal propensity to consume (MPC) and marginal propensity to save (MPS). Show that MPC + MPS = 1. [2 marks]

State MPC = ΔC/ΔY and MPS = ΔS/ΔY. Since S = Y − C, derive MPS = 1 − MPC by differentiating, proving the relationship.

An economy has consumption function C = 50 + 0.8Y and investment I = 100. (i) Calculate the equilibrium income. (ii) If investment rises to 150, what is the new equilibrium income? (iii) Explain the role of the multiplier in this adjustment. [5 marks]

Use Y = C + I equilibrium condition. Substituting C = 50 + 0.8Y and I, solve for Y. Calculate multiplier k = 1/(1 − MPC) = 5 and apply to ΔI = 50 to find new income; explain how each round of spending generates additional income.

Distinguish between deflationary gap and inflationary gap. Explain with diagrams and policy measures how each gap can be corrected. Why is understanding these gaps important for macroeconomic management? [6 marks]

Define deflationary gap as actual AD < full employment AD (unemployment) and inflationary gap as actual AD > full employment AD (excess demand). Draw AD-AS diagrams showing full employment output; for deflationary gap use expansionary policy (↑G or ↓T); for inflationary gap use contractionary policy (↓G or ↑T). Explain both create deadweight loss and instability — gaps must be closed for stable, full employment equilibrium.

Assertion-Reason Questions for Determination of Income and Employment

Q1. Assertion (A):

In the consumption function C = C̄ + cY, the autonomous consumption C̄ represents consumption that occurs regardless of the level of income.

Reason (R):

Autonomous consumption is defined as that part of total consumption which is independent of income level and continues even when income is zero.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains why autonomous consumption exists in the consumption function. The reason directly defines autonomous consumption as the component independent of income, which is precisely what the assertion states.

Q2. Assertion (A):

The multiplier effect in an economy with MPC = 0.8 will be larger than in an economy with MPC = 0.6.

Reason (R):

A higher marginal propensity to consume leads to more rounds of spending, increasing the multiplier value according to the formula k = 1/(1 − MPC).

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true and the reason is the correct explanation. With MPC = 0.8, k = 1/0.2 = 5; with MPC = 0.6, k = 1/0.4 = 2.5. The higher MPC directly causes the larger multiplier through the denominator (1 − MPC) in the formula.

Q3. Assertion (A):

A deflationary gap requires a reduction in government spending to restore full employment equilibrium.

Reason (R):

A deflationary gap occurs when actual aggregate demand is less than full employment aggregate demand, creating unemployment.

Answer: D — A is false but R is true — The assertion is false but the reason is true. When a deflationary gap exists (actual AD < full employment AD), the solution is to INCREASE government spending or investment to boost aggregate demand, not reduce it. Reducing spending would worsen the gap. The reason correctly identifies what a deflationary gap is.

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Case-Based Questions (CBQ) for Determination of Income and Employment

Case Study:

A small island economy called Serenity has the following consumption function: C = 200 + 0.8Y, where consumption and income are measured in crore rupees. The economy is currently in equilibrium with planned investment of Rs 300 crore. Serenity's economic planners are analyzing the stability of this equilibrium. They calculate that if investment unexpectedly decreases to Rs 250 crore (ex-post), while planned investment remains Rs 300 crore, unplanned inventory accumulation occurs. They want to understand how to maintain full employment through fiscal policy.

Q1. What is Serenity's marginal propensity to consume?

  • A. 0.2
  • B. 0.5
  • C. 0.8 ✓
  • D. 1.0

Answer: C

Q2. At the current equilibrium with I = Rs 300 crore, what is the equilibrium income level?

  • A. Rs 1,500 crore
  • B. Rs 2,000 crore
  • C. Rs 2,500 crore ✓
  • D. Rs 3,000 crore

Answer: C

Q3. When ex-post investment falls to Rs 250 crore while ex-ante remains at Rs 300 crore, what happens?

  • A. Planned savings exceed planned investment by Rs 50 crore ✓
  • B. Unplanned inventory accumulation occurs equal to Rs 50 crore
  • C. Actual savings exceed actual investment by Rs 50 crore
  • D. Firms experience unplanned inventory depletion

Answer: A

Q4. If Serenity's government wants to increase equilibrium income by Rs 500 crore, how much should it increase autonomous spending (investment or government expenditure)?

  • A. Rs 100 crore ✓
  • B. Rs 125 crore
  • C. Rs 250 crore
  • D. Rs 500 crore

Answer: A

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Previous Year Questions (PYQ) for Determination of Income and Employment

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 58/1/1 · 1 mark

In an economy, when __________ is insufficient to achieve the level of output corresponding to the full employment, the difference is termed a deflationary gap.

  • ex-ante Aggregate Demand
  • ex-post Aggregate Demand
  • ex-ante Aggregate Supply
  • ex-post Aggregate Supply

CBSE 2026 · Set 58/1/1 · 1 mark

Identify, which of the following is true at the Break Even level of Income.

  • Slope of Consumption Curve = Slope of Saving Curve
  • Average Propensity to Consume (APC) = Average Propensity to Save (APS)
  • Slope of Saving Curve = Unity (1)
  • Average Propensity to Consume (APC) = Unity (1)

CBSE 2026 · Set 58/1/1 · 4 marks

Refer the given image carefully: Explain any two measures that can be taken by the Central Bank to control the indicated macroeconomic problem.

CBSE 2026 · Set 58/1/1 · 4 marks

Income of an economy increased from ` 20,000 to ` 50,000 crore. Savings of the economy increased from ` 2,000 crore to ` 10,000 crore. (i) Calculate Average Propensity to Consume (APC) and Average Propensity to Save (APS), before and after the rise in income. (ii) Draw appropriate conclusion regarding the behaviour of Average Propensity to Consume (APC) as his income increases.

CBSE 2026 · Set 58/1/2 · 4 marks

[Diagram/Map-based question — skipped]

Refer the given image carefully. Explain any two measures that can be taken by the Central Bank to control the indicated macroeconomic problem.

CBSE 2026 · Set 58/1/2 · 6 marks

Income of an economy increased from ₹ 40,000 to ₹ 1,00,000 crore. Savings of the economy increased from ₹ 4,000 crore to ₹ 20,000 crore. (i) Calculate Average Propensity to Consume (APC) and Average Propensity to Save (APS) before and after the rise in income. (ii) Draw appropriate conclusion regarding the behaviour of Average Propensity to Save (APS) as his income increases.

CBSE 2026 · Set 58/1/3 · 6 marks

Under a study, examining the spending habits of a hypothetical economy, it was observed that even households with zero income managed to consume basic necessities. As the income of people increased, their consumption also increased, but not as rapidly as income. Based on the given text and common understanding, answer the following questions: (i) Identify and elaborate the type of consumption indicated in the first para of the above text. (ii) Explain, the reason behind the positive slope of Aggregate Demand Curve.

CBSE 2026 · Set 58/2/1 · 1 mark

Choose the correct consumption function from the options given below with reference to the illustrated given diagram.

  • C = 100 + 0.7Y
  • C = 100 + 0.8Y
  • C = 100 – 0.7Y
  • C = 100 – 0.8Y

CBSE 2026 · Set 58/2/1 · 1 mark

The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have _________.

  • same components
  • different slope
  • same slope
  • inverse relationship

CBSE 2026 · Set 58/2/1 · 3 marks

Estimate the value of subsistence level of consumption expenditure from the following data about an economy which is in equilibrium: (i) National Income (Y) = ` 1,200 crore (ii) Marginal Propensity to Save (MPS) = 0.20 (iii) Investment Expenditure (Ī) = ` 100 crore

CBSE 2026 · Set 58/2/2 · 1 mark

Choose the correct consumption function from the options given below with reference to the illustrated given diagram. [Diagram-based question — skipped]

  • C = 100 + 0.7Y
  • C = 100 + 0.8Y
  • C = 100 – 0.7Y
  • C = 100 – 0.8Y

CBSE 2026 · Set 58/2/2 · 3 marks

Calculate the value of Ex-ante Aggregate Demand (AD), if autonomous investment and consumption expenditure (Ā) = ` 50 crore; and Marginal Propensity to Save (MPS) is 0.2 and level of income is ` 300 crore.

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