CBSE Class 12 Economics National Income And Related Aggregates Worksheet Set E

Short Answer Type Questions

Question. In an economy, an increase in Investment by ₹ 100 crore led to ‘increase’ in National Income by ₹ 1,000 crore. Find Marginal Propensity to Consume.
Answer: ΔY = ΔI 1/1-MPC
1000 = 100 1/1-MPC
OR
1,000 – 1,000 MPC = 100
MPC = 900/1000 = 0.9

Question. In an economy 20 percent of increased income is saved. How much will be the increase in income if investment increases by 10,000 ?
Answer: MPS = 20/100
K = 1/MPS = 1/1/5 = 5
∆Y = K. ∆I
= 5 × 10,000 = 50,000

Question. Explain now the level of effective demand is attained in an economy if, Aggregate Demand is more than Aggregate supply.
Answer: Effective demand refers to that level of output where Aggregate demand is equal to the Aggregate supply.

Question. Calculate Investment Expenditure from the following data about an economy which is in equilibrium : National Income = 1,000 Marginal Propensity to Save (MPS) = 0.25 Autonomous Consumption Expenditure = 200
Answer: Given, Y = C + I
where C = C + b(Y)
∴ Y = C + b(Y) + I 1
∴ 1,000 = 200 + (1 – 0.25) 1,000 + I
or 1,000 = 200 + 0.75 × 1,000 + I 1
or 1,000 = 200 + 750 + I
or 1,000 = 950 + I
or I = 1,000 – 950 I = ₹ 50

Question. In an economy, investment increases from 300 to 500. As a result of this equilibrium level of Income increases by 2,000. Calculate the marginal propensity to consume.
Answer: ∆I = 500 – 300 = 200
K = ∆Y/∆I = 2000/200 = 10
K = 1/MPS
10 = 1/MPS
So MPS =1/10
hence MPC = 1 – MPS = 9/10 = 0.9

Question. Calculate Marginal Propensity to Consume from the following : (i) Equilibrium Income = ₹ 350 (ii) Consumption Expenditure at Zero Income = ₹ 20 (iii) Investment = ₹ 50
Answer: Y = C + I We know, C = C + b(Y)
∴ Y = C + b(Y) + I
or 350 = 20 + b(350) + 50
or 350 = 70 + 350b
or 350b = 280
b = 280/350 = 4/5 = 0.8 
or b = 0.8

Question. In an economy, a 20 percent increase in investment results in a 100 percent increase in income.
Calculate marginal propensity to consume.
Answer: K = (ΔY/ΔI)
K = 100/20 = 5
We know, K = 1/1 -MPC
or 5 = 1/1 -MPC
or 5 – 5 MPC = 1
or 5 – 1 = 5 MPC
or MPC = 4/5 = 0.8

Question. Calculate equilibrium national income from the following : (i) Consumption Expenditure at Zero Income = ₹ 60 (ii) Marginal Propensity to Consume = 0.9 (iii) Investment = ₹ 100 
Answer:
Y = C + I
We know, C = C + b(Y)
∴ Y = C + b(Y) + I
or Y = 60 + 0.9(Y) + 100
Y = 0.9Y + 160
or Y – 0.9Y = 160
or 0.1Y = 160
or Y = 160/0.1 = 1,600
∴ Y = ₹ 1,600

Question. Which of the following cannot have a negative value ? Give reasons. (i) Average propensity to save. (ii) Marginal propensity to save.
Answer: (i) APS can have a negative value because at very low level of income there is dissaving. 
(ii) MPS cannot have a negative value as it is the ratio of ΔS and ΔY and ΔS and ΔY can at the most be zero.

Question. In an economy, income increases from ₹ 5,000 crore to ₹ 6,000 crore as a result of 20 percent increase in investment. Calculate the value of investment multiplier. 
Answer: ΔI = 20%
ΔY = 1,000 or 20%
K = ΔY/ΔI
K = 20%/20% = 1

Question. “Economists are generally concerned about the rising Marginal Propensity to Save (MPS) in an economy”. Explain why ? 
Answer: Since the sum of MPC and MPS is 1. Any increase in Marginal Propensity to Save (MPS) would directly lead to decrease in Marginal Propensity to Consume (MPC). This means that it may lead to lesser proportion of the additional income going for consumption which is a vital factor of Aggregate Demand Expenditure. This may further lead to fall in equilibrium level of income in the economy. If Aggregate Demand exceeds Aggregate Supply, it means buyers are planning to buy more goods and services than producers are planning to produce. Thus, the inventories in hand with the producers will start falling. As a result, producers will plan to raise the production. This will increase the level of income upto the level Aggregate Demand is equal to Aggregate Supply.

Question. If in an economy’s saving function is given by S = (–) 50 + 0.2 Y and Y = ₹ 2,000 crore; consumption expenditure for the economy would be ₹ 1,650 crore and the autonomous investment is ₹ 50 crore and the marginal propensity to consume is 0.8. True or False ? Justify your answer with proper calculations. 
Answer: Yes, all the given values are correct. S = – 50 + 0.2Y
S = – 50 + 0.2 (2,000)
= 50 + 400
= ` 350 crore
At equilibrium level of income: Y = C + S
2,000 = C + 350
C = 2,000 – 350
= 1,650 (in ` crore)
MPC + MPS = 1
MPC + 0.2 = 1
MPC = 1 – 0.2 = 0.8

Question. If marginal propensity to consume is 0.5, calculate the value of investment multiplier.
Answer: Multiplier (k) = 1/1-MPC
= 1/1 – 0.5
= 2

Question. Find the Investment from the following : National Income = ₹ 600 Autonomous Consumption = ₹ 150 Marginal Propensity to Consume = 0.70
Answer: Y = ₹ 600 C = ₹ 150 MPC or b = 0.70
We know that, Y = C + S
or Y – C = S
or S = Y – C or S = 600 – [C + (b)Y] 
or S = 600 – [150 + 0.7 × 600] 1
or S = 600 – [150 + 420] S = 600 – 570
or S = ₹ 30 As, I = S = ₹ 30
Hence, Investment = ₹ 30

Question. Calculate Multiplier when MPC is 4/5 and 1/2 . From the calculations establish the relation between the size of the Multiplier and the size of MPC ?
Answer: Multiplier = 1/1-MPC
When MPC = 4/5
K = 1/1-0.8 = 1/0.2 = 5
When MPC = 1/2
K = 1/1-0.5 = 1/0.5 = 2
Observing the same we may conclude that there exist positive or direct relation between MPC and Investment Multiplier. Investment Multiplier coefficient measures the change in final income with respect to given change in the initial investment in the economy. It carries direct relation with rate of growth in an economy, i.e. higher the MPC more chance of growth exists in an economy. But, it is a two sided sword hence if investment falls in an economy the income may also fall.

Question. If in an economy, C = 500 + 0.9 Y and I = ₹ 1,000 crores. (where C = Consumption expenditure, Y = National Income, I = Investment) Calculate the following : (i) Equilibrium level of income (ii) Value of investment multiplier
Answer: (i) Equilibrium level of income will be determined when
Y = C + I
Y = 500 + 0.9 Y + 1000
Y– 0.9Y = 1500
Y = 1500/0.10 = ₹ 15,000 crore
(ii) Value of investment Multiplier = 1/1-MPC

Question. Find Consumption Expenditure from the following :
National Income = ₹ 5,000
Autonomous Consumption = ₹ 1,000
Marginal Propensity to Consume = 0.8A
Answer: Y = C + I and we know, C = C + b(Y)
∴ Y = C + b(Y) + I
or C = 1,000 + 0.8(5,000) 1
or C = 1,000 + 4,000
or C = ₹ 5,000 

Question. Marginal Propensity to Consume is zero. Calculate the change in income if investment falls by ₹ 1,000 crores.
Answer: MPC = 0
K = 1/1-MPC
= 1/1-10 = 1/1
or K = 1
and K = ΔY/ΔI
1 = ΔY/1000 or ΔY = 1,000
Therefore, change in income is ₹ 1,000 crore.

Question. From the following data calculate investment expenditure : (i) Marginal propensity to save = 0.2 (ii) Equilibrium level of income = 22500
(iii) Autonomous consumption = 500
Answer: Y = C + (1 – MPS)Y + I 1½
22,500 = 500 + (1 – 0.2) 22,500 + I 
I = 22,500 – 500 – 18,000 = 4000 
(Calculation based on I = Y – C is also correct) (No marks if only the final answer is given)

Question. What is meant by aggregate demand? State its components.
Answer: Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year.
Components :
(i) Private consumption expenditure
(ii) Government consumption expenditure
(iii) Investment expenditure
(iv) Net exports.

Question. Calculate consumption expenditure in the economy whose equilibrium level of income is 20,000, autonomous consumption is 500 and marginal propensity to save is 0.5.
Answer: C = C + (1 – MPS)Y 
= 500 + (1 – 0.5) 20,000 1
C = 500 + 10,000 = 10,500

Question. Find the value of multipliers given (i) Marginal Propensity to Consume = 1 and (ii) Marginal Propensity to Save = 1.
Answer: (i) Here, MPC = 1
Hence, Multiplier (K) = 1/1-MPC = 1/1-1 = ∞
So, Multiplier = ∞ (infinity) (ii) Here, MPS = 1
Now, K = 1/MPC = 1/1
Hence, Multiplier (K) = 1

Question. From the following data calculate the equili- brium level of national income :
(i) autonomous consumption = 500
(ii) marginal propensity to save = 0.2 (iii) Investment = 2000
Answer: Y = C + (1 – MPS)Y + I 1½
Y = 500 + (1 – 0.2)Y + 2,000 1
0.2Y = 2,500, Y = 12,500

Question. Estimate the value of ex-ante AD, when autonomous investment and consumption expenditure (A) is 50 crores, and MPS is 0.2 and level of income is 300 crores.
Answer: MPC = 1 – MPS
MPC = 1 – 0.2
MPC = 0.8 AD = C+I AD = A +bY
AD = 50 + 0.8 (300)
AD = 290 Crores

Question. Find National Income from the following : Autonomous Consumption = ₹ 100 Marginal Propensity to Consume = 0.60 Investment = ₹ 200 
Answer: Here, C = ₹ 100, MPC
or b = 0.60, I = ₹ 200 b = 0.6 I = S = ₹ 200 Now, we know that Y = C + S
or Y – S = C
or Y – S = C + (b)y
[∴ C = C + bY]
or Y – 200 = 100 + 0.6Y
or Y – 0.6Y = 100 + 200
or 1.4Y = 300
Y = 300/0.4 = ₹ 750
Hence, National Income (Y) = ₹ 750 

Question. As a result of increase in investment by ₹ 60 crore. National Income rises by ₹ 240 crore. Calculate Marginal Propensity to Consume.
Answer: Here, ΔI = ₹ 60 crore, ΔY = ₹ 240 crore Hence, Multiplier (K) = ΔY/ΔI = 240/60 = 4
Now, K = 1/1-MPC
or 4 = 1/1-MPC
or 4 – 4 MPC = 1
or 4 MPC = 4 – 1
or MPC = 3/4
= 0.75

Question. Estimate the value of Aggregate demand in an economy if :
(i) Autonomous Investment (i) = ₹ 100 crore (ii) Marginal Propensity to save = 0.2 (iii) Level of Income (y) = ₹ 4000 crore (iv) Autonomous Consumption Expenditure (c) = ₹ 50 crore 
Answer: The Aggregate Demand(AD) function is given as : AD = C + I
AD=[c+b(Y)] + I
c = 50
b or MPC = 1 – MPS = 1 – 0.2 = 0.8
Substituting the values of c and b in AD function,
we get :
AD = [50 + 0.8 (4000)]+ 100 = ₹ 3,350 crores
Aggregate Demand is ₹ 3,350 crores

Question. If in an economy :
(i) Consumption function is given by C = 100 + 0.75
Y, and (ii) Autonomous investment is ` 150 crores. Estimate (a) Equilibrium level of income and (b) Consumption and Savings at the equilibrium level of income.
Answer: C = 100 + 0.75 Y
I = 150 (i) At equilibrium level of income :
Y = C + I
Y = 100 + 0.75
Y + 150
Y = 0.75
Y + 250
Y = 250/0.25 = 1,000 (in ₹ crores)
(ii) C = 100 + 0.75Y
= 100 + 0.75(1,000)
= 100 + 750 = 850 (in ₹ crores)
Y = C + S or S
= Y – C = 1,000 – 850
= 150

Question. Distinguish between voluntary unemployment and involuntary unemployment. What is the significance of this distinction ?
Answer: Voluntary Unemployment : It is the part of the working force which is not willing to engage itself in gainful occupation.
Involuntary Unemployment : It is the part of the labour force which is willing and able to work at the prevailing wage rate but is out of work.
Significance—It helps to estimate Aggregate Demand.

Question. In an economy C = 200 + 0.5y is the consumption function where C is the consumption expenditure and Y is the national income. Investment expenditure is ₹ 400 crores. Is the economy in equilibrium at an income level. ₹ 1500 crores ? Justify your answer.
Answer: No Economy is not in a state of equilibrium at ₹ 1500 crores Given Consumption function, C = 200 + 0.5Y Investment expenditure (I) = ₹ 400 croreAT the equilibrium levelY = C + I Substituting the values from the question :
Y = (200 + 0.5Y) + 400
Y – 0.5Y = 600 Y= 600/0.5
= 1200 The equilibrium level of income is ₹ 1200 crores. The given income ₹ 1500 crore is greater than equilibrium level of income. Therefore, the economy is not in equilibrium.

Question. Calculate Value Added at factor cost from the following.