RBSE Solutions Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings

RBSE Class 12 Economics Chapter 20 Practice Questions

RBSE Class 12 Economics Chapter 20 Multiple Choice Questions

Question 1. What is Formula of the Marginal Propensity to Consume?
(a) \( \frac { \Delta S }{ \Delta Y } \)
(b) \( \frac { C }{ Y } \)
(c) \( \frac { \Delta C }{ \Delta Y } \)
(d) zero.
Answer: (c) \( \frac { \Delta C }{ \Delta Y } \)
In simple words: The Marginal Propensity to Consume (MPC) is found by dividing the change in consumption by the change in income. This tells us how much more people spend when their income goes up.

🎯 Exam Tip: Remember the basic formula for MPC: change in consumption divided by change in income. This is a key concept in macroeconomics.

Question 3. If APC = APS, then what will be the independent value of APC and APS respectively ?
(a) Zero
(b) 1
(c) 0.5
(d) 0.7
Answer: (c) 0.5
In simple words: When the Average Propensity to Consume (APC) is equal to the Average Propensity to Save (APS), both will have a value of 0.5. This means half of the income is consumed, and the other half is saved.

🎯 Exam Tip: Recall that APC + APS = 1. If APC = APS, then 2 * APC = 1, which means APC = 0.5. This is a common shortcut for such problems.

Question 4. The value of MPC plus MPS is equal to :
(a) Zero
(b) Infinite
(c) None of these
(d) 1
Answer: (d) 1
In simple words: The Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) always add up to one. This is because any extra income is either spent or saved.

🎯 Exam Tip: The identity MPC + MPS = 1 is fundamental in Keynesian economics. It shows how every extra unit of income is allocated between consumption and saving.

RBSE Class 12 Economics Chapter 20 Very Short Answer Type Questions

Question 1. What do you understand by the Marginal Propensity to Consume ?
Answer: The Marginal Propensity to Consume (MPC) is the ratio that shows how much consumption changes when there is a change in income. For example, if your income goes up by Rs. 100 and you spend Rs. 80 of that, your MPC is 0.8.
Mathematically, \( \text{MPC} = \frac { \Delta C }{ \Delta Y } \)
In simple words: MPC tells us what part of an extra rupee of income a person will spend. It is the change in spending divided by the change in income.

🎯 Exam Tip: When defining MPC, always mention "change in consumption" and "change in income" to highlight its marginal nature.

Question 2. If MPC = 0.5, what is MPS?
Answer: The Marginal Propensity to Save (MPS) can be found using the formula: MPS = 1 - MPC.
Given that MPC = 0.5,
MPS = 1 - 0.5
MPS = 0.5
This means that if people spend half of any additional income, they also save the other half.
In simple words: If people spend half of any new money they get (MPC = 0.5), then they save the other half (MPS = 0.5).

🎯 Exam Tip: The relationship MPS = 1 - MPC is essential. If you know one, you can easily calculate the other, making it a quick check for numerical problems.

Question 4. What is an investment function ?
Answer: An investment function shows the relationship between investment and the factors that influence it. It primarily refers to the process of acquiring new productive assets, such as machinery or buildings, and using them to produce goods and services. The function describes how investment levels respond to changes in economic variables.
In simple words: An investment function explains what makes businesses invest more or less. It looks at how new tools and factories are bought to make things.

🎯 Exam Tip: When explaining investment function, emphasize that it's about acquiring *new* productive assets for future production, not just buying existing assets.

Question 5. What is Average Propensity to Save ?
Answer: The Average Propensity to Save (APS) is the ratio of total savings to total income. It tells us, on average, what proportion of a person's or economy's income is saved. This shows the overall saving behavior at a given income level.
In simple words: APS is the share of your total income that you save. If you earn Rs. 100 and save Rs. 20, your APS is 0.2.

🎯 Exam Tip: Clearly distinguish APS from MPS. APS is about total saving from total income, while MPS is about *additional* saving from *additional* income.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions

Question 1. What do you understand by Average Propensity to Consume? How is it measured ?
Answer: Average Propensity to Consume (APC) refers to the proportion of total consumption to a specific level of total income in an economy. It represents the part of the total income that people spend on consuming goods and services. For instance, if an economy's total income is Rs. 1000 and total consumption is Rs. 800, the APC is 0.8.
It is measured by dividing the total consumption (C) by the total income (Y).
\( \text{APC} = \frac { C }{ Y } = \frac { \text{Total Consumption} }{ \text{Total Income} } \)
In simple words: APC is the part of your whole income that you spend. You find it by dividing your total spending by your total earnings.

🎯 Exam Tip: When calculating APC, ensure you are using total consumption and total income, not changes in these values, as that would be MPC.

Question 2. What do you mean by investment ?
Answer: Investment means adding new productive assets and using them in the production of goods and services. This includes buying new machines, building factories, or adding to stock, which helps an economy produce more in the future. Investment is a key driver of economic growth.
In simple words: Investment is when businesses buy new things like machines or build factories to make more goods and services.

🎯 Exam Tip: In economics, "investment" refers to real capital formation (new assets), not just financial transactions like buying shares.

Question 4. What do you understand by Marginal Propensity to Save and Marginal Propensity to Consume ?
Answer: Marginal Propensity to Save (MPS) refers to the change in savings that results from a change in income. When income increases, people save a part of that extra income, and the MPS measures this proportion. For example, if an additional Rs. 100 income leads to Rs. 20 in savings, the MPS is 0.2.
\( \text{MPS} = \frac { \Delta S }{ \Delta Y } = \frac { \text{Change in Savings} }{ \text{Change in Income} } \)
Marginal Propensity to Consume (MPC) refers to the change in consumption that is caused by a change in income. When income increases, consumption also increases. Similarly, if income decreases, consumption decreases. The MPC measures the proportion of additional income that is spent on consumption. For example, if an additional Rs. 100 income leads to Rs. 80 in consumption, the MPC is 0.8.
\( \text{MPC} = \frac { \Delta C }{ \Delta Y } = \frac { \text{Change in Consumption} }{ \text{Change in Income} } \)
In simple words: MPS shows how much of any new income is saved, while MPC shows how much of any new income is spent. Together, they always add up to one.

🎯 Exam Tip: Clearly define both MPS and MPC using the concept of "change" in savings/consumption relative to "change" in income. Their sum always equals 1.

RBSE Class 12 Economics Chapter 20 Other Important Questions - Answers

RBSE Class 12 Economics Chapter 20 Multiple – Choice Questions

Question 1. Which of the following statements is true ?
(a) MPC + MPS = 0
(b) MPC + MPS < 1
(c) MPC + MPS = 1
(d) None of these
Answer: (c) MPC + MPS = 1
In simple words: The correct statement is that the Marginal Propensity to Consume (MPC) plus the Marginal Propensity to Save (MPS) always equals one. This means any extra income is either spent or saved.

🎯 Exam Tip: Always remember the fundamental identity MPC + MPS = 1, as it's crucial for understanding how income changes affect consumption and saving.

Question 3. Who wrote the book – “The General Theory of Employment, Interest and Money"?
(a) Marshall
(b) Pigou
(c) Keynes
(d) Sameulson
Answer: (c) Keynes
In simple words: The important book "The General Theory of Employment, Interest and Money" was written by a famous economist named Keynes. This book changed how people thought about how economies work.

🎯 Exam Tip: John Maynard Keynes is a pivotal figure in economics, and knowing his major works, especially "The General Theory...", is essential for understanding macroeconomics.

Question 4. When did financial crises appear in America, Great Britain and other countries:
(a) 1929-33
(b) 1928-33
(c) 1929-34
(d) 1930-33
Answer: (a) 1929-33
In simple words: The big financial crisis, also known as the Great Depression, happened in America, Great Britain, and other places between 1929 and 1933. This was a very hard time for the world economy.

🎯 Exam Tip: The Great Depression (1929-1933) is a key historical event that prompted significant changes in economic theory and policy, particularly Keynesian economics.

Question 5. When did Keynes write his book?
(a) 1936
(b) 1940
(c) 1938
(d) 1945
Answer: (a) 1936
In simple words: Keynes wrote his very important book, "The General Theory of Employment, Interest and Money," in 1936. This book brought new ideas about how to fix economic problems.

🎯 Exam Tip: Knowing the publication year (1936) of Keynes's "The General Theory..." helps contextualize its impact on economic thought during the aftermath of the Great Depression.

Question 6. What does 'a' mean in C = a + b Yd
(a) Autonomous consumption
(b) Induced consumption
(c) Investment
(d) None of the options
Answer: (a) Autonomous consumption
In simple words: In the equation C = a + b Yd, 'a' stands for autonomous consumption. This is the part of spending that happens no matter your income, even if your income is zero, like basic needs that are met through savings or borrowing.

🎯 Exam Tip: Understand the components of the consumption function: 'a' is autonomous consumption (independent of income), and 'b Yd' is induced consumption (dependent on disposable income).

Question 7. Value of MPC is :
(a) More than zero
(b) More than one
(c) Between zero and one
(d) None of these
Answer: (c) Between zero and one
In simple words: The Marginal Propensity to Consume (MPC) is always a number between zero and one. This means that if you get extra income, you will spend some of it, but not all of it, and you won't spend more than you get.

🎯 Exam Tip: The MPC typically falls between 0 and 1 because people usually save a part of any additional income and do not spend more than the extra income received.

Question 8. MPC will be minimum at :
(a) 0
(b) 1
(c) 0.5
(d) 0.7
Answer: (a) 0
In simple words: The Marginal Propensity to Consume (MPC) would be at its minimum, zero, if people saved all of their extra income and spent none of it.

🎯 Exam Tip: MPC is 0 when all additional income is saved, and MPC is 1 when all additional income is consumed. These are the theoretical minimum and maximum values.

Question 9. Sum of APS and APC equals to :
(a) zero
(b) one
(c) infinite
(d) none of these
Answer: (b) one
In simple words: If you add up the Average Propensity to Save (APS) and the Average Propensity to Consume (APC), the total will always be one. This means that all of your income is either spent or saved.

🎯 Exam Tip: The identity APC + APS = 1 is another fundamental relationship in consumption theory, similar to MPC + MPS = 1.

Question 10. Investment made by the government is called as :
(a) Autonomous investment
(b) Private investment
(c) Public investment
(d) Induced investment
Answer: (a) Autonomous investment
In simple words: Investment made by the government, which does not depend on profit or income levels, is called autonomous investment. It is usually done for public welfare, like building roads or hospitals.

🎯 Exam Tip: Autonomous investment is typically undertaken by the government or for public welfare, regardless of profit expectations, making it independent of income or interest rates.

Question 1. What was the assumption of Classical Economists?
Answer: Classical economists assumed that an economy naturally tends towards full employment. They believed that market forces, if left unregulated, would always ensure that all available resources, including labor, were fully utilized. This meant there would be no involuntary unemployment in the long run.
In simple words: Classical economists thought that a country's economy would always reach a point where everyone who wanted to work could find a job.

🎯 Exam Tip: The key assumption of classical economists is *full employment* achieved through flexible prices and wages, which contrasts with Keynesian theory.

Question 2. In which book did Keynes criticize the classical theory of employment ?
Answer: Keynes criticized the classical theory of employment in his famous book titled “The General Theory of Employment, Interest and Money”. This book, published in 1936, introduced new ideas that challenged the long-held classical views on unemployment and economic cycles.
In simple words: Keynes criticized old economic ideas about jobs in his book called "The General Theory of Employment, Interest and Money."

🎯 Exam Tip: When discussing Keynes's critique, always mention "The General Theory of Employment, Interest and Money" as his foundational work.

Question 3. What kind of theory of Keynes is income and employment theory?
Answer: Keynes's income and employment theory is primarily a short-term theory. It focuses on how aggregate demand determines the level of income and employment in an economy within a relatively short period, where factors like capital stock and technology are assumed to be fixed. The theory helps explain business cycles and unemployment in the short run.
In simple words: Keynes's ideas about income and jobs are a short-term theory. It explains how things work right now, not far into the future.

🎯 Exam Tip: Emphasize "short-term" when describing Keynesian theory, as it differentiates it from long-term classical growth models.

Question 4. Whose functions are saving and consumption ?
Answer: Both savings and consumption are functions of income. This means that the levels of saving and consumption in an economy depend directly on the level of income. As income changes, both saving and consumption levels tend to change in predictable ways.
In simple words: How much people save and how much they spend both depend on how much money they earn.

🎯 Exam Tip: Clearly state that both consumption and saving are *functions of income* in economic models.

Question 5. What is meant by Propensity to Consume?
Answer: Propensity to Consume refers to the actual quantity of goods and services consumed at different income levels, not merely the desire to consume. It shows the relationship between income and consumption expenditure. This concept highlights how much of their income people are likely to spend rather than save.
In simple words: Propensity to Consume means how much people actually spend from their income. It is about their actual buying, not just wanting to buy.

🎯 Exam Tip: Differentiate "propensity to consume" (actual spending pattern) from mere "desire to consume" (a want). Focus on the observed relationship between income and consumption.

Question 6. What is marginal propensity to consume ?
Answer: Marginal Propensity to Consume (MPC) is the ratio between the proportion of change in consumption and the proportion of change in income. In simpler terms, it measures how much of each additional rupee of income is spent on consumption. For example, an MPC of 0.8 means that 80 paise of every extra rupee earned is spent.
In simple words: MPC tells us what part of any new money a person earns will be spent on buying things.

🎯 Exam Tip: Always define MPC using "change in consumption" and "change in income" to emphasize its marginal nature.

Question 7. Write the formula for Marginal Propensity to Consume.
Answer: The formula for Marginal Propensity to Consume (MPC) is:
\( \text{MPC} = \frac { \Delta C }{ \Delta Y } \)
Where \( \Delta C \) represents the change in consumption and \( \Delta Y \) represents the change in income. This formula helps to quantify how changes in income affect spending habits.
In simple words: The formula for MPC is simply the change in how much people spend, divided by the change in how much money they earn.

🎯 Exam Tip: When writing economic formulas, always define the variables used clearly.

Question 8. What is saving?
Answer: Saving is the remaining part of total income left after consumption expenditure. It represents the portion of current income that is not spent on goods and services but rather set aside for future use. Savings can be held as cash, deposited in banks, or invested.
In simple words: Saving is the money you have left from your income after you have bought everything you need or want to buy.

🎯 Exam Tip: Define saving as the *residual* of income after consumption, emphasizing its role for future spending or investment.

Question 9. What kind of correlation is found between income and consumption ?
Answer: A positive correlation is found between income and consumption. This means that as income increases, consumption generally increases, and conversely, as income decreases, consumption tends to decrease. This direct relationship is a fundamental concept in economic analysis.
In simple words: There is a positive link between income and consumption. This means when people earn more money, they usually spend more, and when they earn less, they spend less.

🎯 Exam Tip: Always specify "positive correlation" or "direct relationship" to describe the link between income and consumption in economic theory.

Question 10. Write the formula for Average Propensity to Save.
Answer: The formula for Average Propensity to Save (APS) is:
\( \text{Average Propensity to Save (APS)} = \frac { S \text{ (Quantity of savings)} }{ Y \text{ (Quantity of income)} } \)
Where S represents total savings and Y represents total income. This formula helps calculate the average proportion of income that is saved.
In simple words: To find APS, you divide the total amount of money saved by the total amount of money earned.

🎯 Exam Tip: Distinguish APS from MPS: APS uses total savings and total income, while MPS uses changes in these values.

Question 11. Write the formula for Marginal Propensity to Save (MPS).
Answer: The formula for Marginal Propensity to Save (MPS) is:
\( \text{Marginal Propensity to Save (MPS)} = \frac { \Delta S \text{ (Change in savings)} }{ \Delta Y \text{ (Change in income)} } \)
Where \( \Delta S \) represents the change in savings and \( \Delta Y \) represents the change in income. This formula shows what proportion of an additional rupee of income is saved.
In simple words: The formula for MPS is the change in how much people save, divided by the change in how much money they earn.

🎯 Exam Tip: For MPS, remember to use "change in savings" and "change in income" to capture the marginal concept accurately.

Question 12. What is meant by average propensity to consume ?
Answer: Average Propensity to Consume (APC) is that part of income which is spent on total consumption. It indicates the proportion of total income that is used for current spending on goods and services. For instance, if a household earns Rs. 1000 and spends Rs. 700, its APC is 0.7.
In simple words: Average propensity to consume means how much of your total income you spend on everything you buy.

🎯 Exam Tip: Average Propensity to Consume (APC) is about the *total* proportion of income spent, while Marginal Propensity to Consume (MPC) is about the proportion of *additional* income spent.

Question 13. Write the formula for Average Propensity to Consume.
Answer: The formula for Average Propensity to Consume (APC) is:
\( \text{APC} = \frac { \text{Total Consumption (C)} }{ \text{Total Income (Y)} } \)
This formula measures the proportion of total income that is spent on consumption at a given income level.
In simple words: The formula for APC is to divide the total amount of money spent by the total amount of money earned.

🎯 Exam Tip: Always define the variables (C for consumption, Y for income) when writing economic formulas.

Question 14. Define investment.
Answer: Investment refers to the expenditure made for the production of new capital goods in an economy within a given year. This includes spending on new machinery, factories, buildings, and additions to inventories that enhance productive capacity. It is a crucial component of aggregate demand.
In simple words: Investment is money spent on new tools, machines, and buildings to make more things in the future.

🎯 Exam Tip: Emphasize "new capital goods" and "production" when defining investment to distinguish it from financial transactions.

Question 15. Why MPC does not exceed its value from 1?
Answer: The Marginal Propensity to Consume (MPC) does not exceed the value of 1 because the sum of MPC and Marginal Propensity to Save (MPS) is always equal to 1. This means that any additional income received is either entirely consumed or entirely saved, or a combination of both. It cannot be more than the total additional income.
In simple words: MPC cannot be more than 1 because any extra money you get can only be either spent or saved, not more than what you received.

🎯 Exam Tip: The core reason MPC cannot exceed 1 is the identity MPC + MPS = 1, which means every unit of additional income must be either consumed or saved.

Question 16. What will be the value of MPC, when MPS = 0 ?
Answer: When MPS = 0, the value of MPC will be 1. This is because the sum of MPC and MPS is always 1 (MPC + MPS = 1). If people save none of their additional income, it implies they spend all of it.
\( \text{MPC} = 1 - \text{MPS} \)
\( \text{MPC} = 1 - 0 \)
\( \text{MPC} = 1 \)
In simple words: If people save nothing from their extra income (MPS = 0), then they must spend all of it. So, the MPC would be 1.

🎯 Exam Tip: This scenario implies that every additional rupee of income is entirely consumed, a theoretical extreme for the MPC.

Question 17. If MPS = 0.4, what will be the value of MPC ?
Answer: If MPS = 0.4, the value of MPC will be 0.6. This is calculated using the fundamental relationship that MPC + MPS = 1. Therefore, if we know one, we can easily find the other.
\( \text{MPC} = 1 - \text{MPS} \)
\( \text{MPC} = 1 - 0.4 \)
\( \text{MPC} = 0.6 \)
In simple words: If people save 40 paise from every extra rupee they get (MPS = 0.4), then they must spend the remaining 60 paise (MPC = 0.6).

🎯 Exam Tip: Always use the identity MPC + MPS = 1 to quickly solve problems where one of the marginal propensities is given and the other needs to be found.

Question 18. How is the analysis of Employment theory of Keynes, in context of time ?
Answer: The analysis of Keynes's Employment theory is considered a short-term analysis. Keynes focused on immediate economic problems like unemployment during recessions, explaining how the economy can be in equilibrium below full employment. His theory doesn't primarily deal with long-term economic growth or potential.
In simple words: Keynes's ideas about jobs are focused on the short term. He looked at how to fix problems like unemployment right now, not far in the future.

🎯 Exam Tip: Emphasize the "short-term" nature of Keynesian employment theory, as opposed to long-term growth theories.

Question 19. According to Keynes, how is income determined in the society?
Answer: According to Keynes, income in society is primarily determined through consumption and investment. The total demand for goods and services (aggregate demand), which is made up of consumption, investment, government spending, and net exports, dictates the level of income and employment. When consumption and investment increase, overall income tends to rise.
In simple words: Keynes believed that how much money people earn in a country depends on how much they spend and how much businesses invest.

🎯 Exam Tip: In Keynesian economics, aggregate demand, driven by consumption and investment, is the key determinant of national income.

Question 21. What is meant by public investment?
Answer: Public investment refers to money invested by the government to develop basic infrastructure and provide public services. This includes building roads, bridges, schools, hospitals, and public transportation systems. The goal is often public welfare and economic growth, not just profit.
In simple words: Public investment is when the government spends money to build things like roads, schools, or hospitals for everyone to use.

🎯 Exam Tip: Public investment is distinguished by its government source and focus on public goods and infrastructure, often without direct profit motivation.

Question 22. Write three examples of public investment.
Answer: Three examples of public investment include:
1. Construction of roads and highways, which improve transportation and trade.
2. Building of bridges, connecting regions and facilitating movement.
3. Development of dams and irrigation projects, supporting agriculture and power generation.
These investments enhance a nation's productive capacity and serve public welfare.
In simple words: Examples of public investment are building roads, bridges, and dams.

🎯 Exam Tip: Provide concrete and distinct examples that clearly fall under government-led infrastructure development.

Question 23. What is private investment ?
Answer: Private investment occurs when individuals or private companies invest their money in new factories, buildings, machinery, or equipment. This type of investment is typically driven by the expectation of earning profits and expanding production capacity. It's a key part of economic growth in a market economy.
In simple words: Private investment is when individuals or businesses use their own money to buy new tools, build new stores, or create things that will help them make a profit.

🎯 Exam Tip: The main distinguishing factor for private investment is that it is undertaken by individuals or private entities primarily for profit motives.

Question 24. How many aspects do Savings and Investment have?
Answer: Savings and Investment each have two main aspects: *ex-ante* and *ex-post*. Ex-ante refers to planned or intended savings/investment, while ex-post refers to actual or realized savings/investment. These distinctions are crucial for understanding equilibrium in macroeconomics.
In simple words: Savings and investment each have two sides: what people plan to do (ex-ante) and what they actually do (ex-post).

🎯 Exam Tip: Always remember the terms ex-ante (planned) and ex-post (actual) when discussing the different aspects of savings and investment.

Question 25. What are the two aspects of Savings and Investment ?
Answer: The two aspects of Savings and Investment are:
1. **Ex-ante saving:** This refers to the amount that households *plan* to save at different income levels.
2. **Ex-ante investment:** This refers to the amount that firms *plan* to invest at different income levels.
These planned amounts are important for determining the equilibrium level of income in an economy.
In simple words: The two parts are "planned saving" and "planned investment," which means what people and businesses *intend* to save or invest.

🎯 Exam Tip: Focus on the "planned" or "intended" nature of ex-ante concepts, as they reflect decisions made before actual outcomes are known.

Question 26. What are ex-post savings?
Answer: Ex-post savings refer to the actual saving that results from the family unit's income after all consumption has taken place. It is the realized or actual amount of income that is not consumed over a period. This value can sometimes differ from ex-ante (planned) savings due to unforeseen economic changes.
In simple words: Ex-post savings are the real amount of money a family actually saved from their income after all their spending is done.

🎯 Exam Tip: Emphasize that ex-post savings are the *actual* or *realized* savings, which are the outcome after consumption decisions are made.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions (SA-I)

Question 1. What is meant by total employment ?
Answer: Total employment means a situation where everyone who is willing and able to work at the current wage rate can find a job. This indicates a fully utilized workforce in an economy.
In simple words: Total employment means everyone who wants a job can find one.

🎯 Exam Tip: When defining economic terms, always mention the key conditions, like "willing and able" and "prevailing wage rate" for employment.

Question 3. Write any two features of marginal propensity to consume.
Answer:
1. MPC is always positive. This means that if income increases, consumption will also increase, even if by a small amount.
2. MPC is always more than zero but less than one. This shows that people usually spend only a part of any extra income, not all of it, and they don't spend more than they earn.
In simple words: MPC is always positive and falls between 0 and 1, meaning people spend some, but not all, of their extra income.

🎯 Exam Tip: Remember the range of MPC (between 0 and 1) as it's a fundamental concept in macroeconomics and often tested.

Question 4. Write two features of consumption propensity.
Answer:
1. Consumption propensity refers to the actual amount of money spent on goods and services.
2. Consumption can never be zero, even if the income is zero, because basic needs still need to be met, often through past savings or borrowing.
3. It also shows the actual quantity of goods and services consumed, not just the desire to consume them.
4. It cannot be zero even if the income becomes zero, as people would use past savings or loans to meet their basic needs.
In simple words: Consumption propensity is the actual money spent, and it's never zero, even with no income, because people still have basic needs.

🎯 Exam Tip: Distinguish between the desire to consume and actual consumption; the latter is what consumption propensity measures. Also, always remember that even at zero income, some consumption (autonomous consumption) still occurs.

Question 5. How does income affect savings?
Answer: Income and savings have a positive relationship. When a person's income increases, their savings tend to increase as well. Conversely, if income decreases, savings also decrease. This direct relationship is a key principle in personal finance.
In simple words: As people earn more money, they save more; if they earn less, they save less.

🎯 Exam Tip: Always remember that saving is the part of income not consumed. A positive relationship means they move in the same direction.

Question 6. According to Keynes, level of income and employment depends upon which factor?
Answer: According to John Maynard Keynes, the level of income and employment in a country largely depends on the effective demand during a particular time period. Effective demand is the total spending in an economy, including consumption, investment, government spending, and net exports. When this demand is high, businesses produce more, leading to higher income and employment.
In simple words: Keynes believed that a country's income and how many people have jobs depend on how much money people and businesses are spending in total.

🎯 Exam Tip: Effective demand is a central concept in Keynesian economics; ensure you understand its components and its direct link to output and employment.

Question 7. According to Keynes how can the target of absolute employment be achieved ?
Answer: According to Keynes, the target of absolute (full) employment can be achieved by increasing the effective demand in the economy. When effective demand increases, businesses will produce more, requiring more workers, thereby reducing unemployment and moving towards full employment. This often involves government intervention to stimulate demand.
In simple words: Keynes said we can get everyone working by making sure people and businesses spend more money, which makes companies hire more.

🎯 Exam Tip: For Keynes, government spending is a crucial tool to boost effective demand and move an economy towards full employment during a downturn.

Question 9. Explain the relationship between MPS and MPC with the help of equations.
Answer: The relationship between Marginal Propensity to Save (MPS) and Marginal Propensity to Consume (MPC) is that their sum always equals 1. This is because any additional income (marginal income) can either be consumed or saved. The equation representing this is:
\( \text{MPC} + \text{MPS} = 1 \).
From this, we can also derive:
\( \text{MPC} = 1 - \text{MPS} \)
\( \text{MPS} = 1 - \text{MPC} \)
This shows that if you know one value, you can easily find the other, as the entire extra income must be allocated between saving and consumption.
In simple words: MPC plus MPS always equals one, because any new money you get is either spent or saved.

🎯 Exam Tip: This fundamental identity \( \text{MPC} + \text{MPS} = 1 \) is critical for solving many problems in macroeconomics and understanding income distribution.

Question 10. What is the effect of income rise on APC and MPC ?
Answer: When income rises, both the Average Propensity to Consume (APC) and the Marginal Propensity to Consume (MPC) tend to decrease. However, the MPC usually decreases more significantly than the APC. This is because as people get richer, their basic consumption needs are already met, so they tend to save a larger proportion of any additional income. Therefore, the proportion of total income consumed (APC) and the proportion of extra income consumed (MPC) both fall, but MPC shows a steeper decline.
In simple words: When people earn more, they spend a smaller fraction of their total income and also a smaller fraction of each extra bit of money they get.

🎯 Exam Tip: Remember that the MPC declines because basic needs are met, and people start saving a larger share of marginal income, leading to a flatter consumption function over time.

Question 11. Explain the importance of investment in Keynes' employment principle.
Answer: In Keynes' employment principle, investment plays a crucial role as it directly influences the level of employment in an economy. Higher investment leads to increased production of goods and services, which then requires more workers, thereby increasing the level of employment. This creates a positive cycle where more investment leads to more jobs and economic growth. Investment is a key component of effective demand.
In simple words: Investment is super important in Keynes' ideas because more investment means more production and more jobs for people.

🎯 Exam Tip: Highlight that investment is a volatile component of aggregate demand and a key lever for government policy to influence employment.

Question 12. What do you mean by real investment ?
Answer: Real investment refers to the actual spending on new physical assets and capital goods that increase the economy's productive capacity. This includes building new factories, purchasing new machines, or constructing new buildings. Real investment directly contributes to economic growth by expanding the means of production. It's distinct from financial investment, which is buying existing assets like stocks or bonds.
In simple words: Real investment is when new factories, machines, or buildings are created, which helps the economy produce more.

🎯 Exam Tip: Clearly differentiate real investment (adding to capital stock) from financial investment (buying existing assets) to avoid common misunderstandings.

Question 13. What an induced investment ?
Answer: Induced investment refers to the amount of money invested with the primary goal of earning profit or interest. This type of investment is typically responsive to changes in income and demand; for example, if demand for goods increases, businesses might invest more to produce those goods. It is a key driver for business expansion in a growing economy.
In simple words: Induced investment is when businesses invest money to make more profit, often because demand is going up.

🎯 Exam Tip: Understand that induced investment is driven by economic activity and profit motives, making it sensitive to market conditions.

Question 15. What is intended saving?
Answer: Intended saving, also known as ex-ante saving, is the amount of income that individuals or households plan or desire to save for future needs. It represents the planned portion of income set aside for purposes other than immediate consumption. This is a crucial concept in economic planning and forecasting.
In simple words: Intended saving is the money people plan to put aside from their income instead of spending it right away.

🎯 Exam Tip: Always distinguish between 'intended' (ex-ante) and 'actual' (ex-post) savings, as they can differ due to unforeseen economic changes.

Question 16. What do you mean by actual saving ?
Answer: Actual saving, or ex-post saving, refers to the amount of income that is actually remaining after all consumption has taken place at a specific income level in an economy. It represents what people have truly saved, which may differ from their initial intentions (intended saving) due to unexpected events or changes in income or consumption. This measures the real savings that have occurred.
In simple words: Actual saving is the money people really saved from their income after they spent what they needed to.

🎯 Exam Tip: Remember that actual saving reflects the realized outcome, while intended saving is the planned amount. Discrepancies between the two can signal economic imbalances.

Question 17. What factors affect the induced investment. Explain.
Answer: Induced investment in an economy is affected by several factors. These include the current level of income, which dictates the purchasing power and demand for goods. Changes in income directly influence the need for businesses to expand. Additionally, consumption trends and the state of consumption stocks (inventories) also play a role; if consumption is rising and inventories are low, firms are induced to invest more to meet future demand.
In simple words: Induced investment is affected by how much money people earn, how much they spend, and how many goods are already in shops.

🎯 Exam Tip: Induced investment is directly related to the level of economic activity and demand, so any factor influencing these will affect it.

Question 18. What is autonomous investment ?
Answer: Autonomous investment is investment that is not influenced by changes in the level of income or output. Instead, it is typically determined by factors such as technological advancements, population growth, government policies, or innovations. This type of investment is independent of the current economic conditions and often involves large-scale infrastructure projects initiated by the government. It acts as an external boost to the economy.
In simple words: Autonomous investment is spending that happens no matter what the current income is, often driven by new ideas or government decisions.

🎯 Exam Tip: Autonomous investment is crucial because it provides a baseline level of capital formation, independent of the business cycle.

Question 19. What is interest ? What is its effect on investment ?
Answer: Interest is the cost of borrowing money or the return earned on invested capital. It is essentially the price paid for the use of funds. The rate of interest significantly affects investment decisions. When interest rates are low, borrowing becomes cheaper, motivating businesses to invest more in new projects. Conversely, high interest rates make borrowing expensive, thus discouraging investment. This inverse relationship is fundamental to understanding economic cycles. Low interest rates also encourage real-world spending over saving in a bank.
In simple words: Interest is the fee for borrowing money. Low interest rates make businesses want to invest more, while high rates make them invest less.

🎯 Exam Tip: Always remember the inverse relationship between the interest rate and investment, as it's a key mechanism through which monetary policy influences the economy.

Question 20. What is the nature of marginal efficiency of capital?
Answer: The marginal efficiency of capital (MEC) has an inverse relationship with capital investment. This means that as the amount of investment in capital goods increases, the expected rate of return (MEC) from additional units of capital tends to decrease. This is because, beyond a certain point, each additional unit of capital may yield less profit than the previous one due to diminishing returns or increased competition. This inverse relationship guides investment decisions. MEC is a forward-looking measure, based on expectations of future profits.
In simple words: As you invest more and more capital, the extra profit you expect to get from each new investment tends to go down.

🎯 Exam Tip: Focus on MEC as the expected rate of return on new investment and its declining nature as investment increases, linking it to the law of diminishing returns.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions (SA-II)

Question 1. What is the meaning of consumption function or consumption propensity ?
Answer: The consumption function, or consumption propensity, refers to the relationship between consumption and income. According to Professor Keynes, it describes how the part of income spent on consumption changes with income. As income rises, consumption generally increases, and vice-versa. However, consumption can never be zero, even when income is zero, as basic needs are met through past savings or borrowings. This means there is always a direct and positive link between how much income people have and how much they consume. It also implies the actual quantity of consumption, not just the desire to consume.
Formula: \( C = f(Y_d) \)
Here, \( C \) = Consumption
\( f \) = Function of
\( Y_d \) = Disposable income
If the consumption function is a linear straight line, then:
\( C = a + b(Y_d) \)
Here, \( a \) = Autonomous consumption (consumption when income is zero)
\( b \) = Marginal Propensity to Consume (MPC, the proportion of additional income consumed)
Consumption Propensity has two types:
1. Average Propensity to Consume (APC): This is the proportion of total income that is consumed by society. It is calculated by dividing total consumption by total income.
Formula: \( \text{APC} = \frac{C}{Y} = \frac{\text{Quantity of Consumption}}{\text{Quantity of Income}} \)
2. Marginal Propensity to Consume (MPC): This measures the change in consumption for every unit change in income. It is the ratio of change in consumption to change in income.
Formula: \( \text{MPC} = \frac{\Delta C}{\Delta Y} = \frac{\text{Change in Consumption}}{\text{Change in Income}} \)
Key features of MPC are that it is always positive and lies between 0 and 1. As income increases, MPC tends to decline because basic needs are met, and a larger portion of additional income is saved.
In simple words: The consumption function shows how much people spend based on their income. It means as income goes up, spending also goes up, but you still spend something even with no income. It has two parts: average spending (APC) and extra spending (MPC) from new income.

🎯 Exam Tip: When explaining the consumption function, always mention Keynes' perspective, the relationship with income, the concept of autonomous consumption, and the two key propensities: APC and MPC.

Question 2. Explain Average Propensity to Consume.
Answer: In an economy, the Average Propensity to Consume (APC) refers to the proportion of the total income that is spent on consumption by the entire society. It essentially tells us, on average, how much of every dollar earned is used for consumption. It is calculated by dividing the total consumption by the total income. This concept helps economists understand spending patterns.
Formula: \( \text{APC} = \frac{C}{Y} = \frac{\text{Quantity of Consumption}}{\text{Quantity of Income}} \)
In simple words: APC is the part of your total income that you spend on buying things.

🎯 Exam Tip: Clearly state the formula for APC and explain what each variable represents. Relate it to overall spending habits in an economy.

Question 3. Explain the concept of Marginal Propensity to consume.
Answer: Marginal Propensity to Consume (MPC) is an economic concept that measures how much consumption changes when there is a change in income. Specifically, it is the ratio of the change in consumption to the change in income. If a person gets an extra dollar of income, MPC tells us what fraction of that dollar they will spend. As income increases, consumption also increases, but usually not by the same amount, making MPC a value between 0 and 1.
Formula: \( \text{MPC} = \frac{\Delta C}{\Delta Y} = \frac{\text{Change in Consumption}}{\text{Change in Income}} \)
In simple words: MPC shows how much more people will spend if they get a little bit more income.

🎯 Exam Tip: Emphasize that MPC deals with *changes* in consumption and income, and its value is always between 0 and 1. It is key for understanding the multiplier effect.

Question 4. Explain the concept of propensity of saving.
Answer: The concept of propensity of saving refers to the portion of income that is not consumed and is instead set aside for future use. This unconsumed part of total income is called saving. There is a direct relationship between income and saving; as income increases, saving also increases, and as income decreases, saving decreases. However, the increase in saving is generally more significant than the increase in income after a certain point. The relationship between saving and income is described by the saving function.
In simple words: Propensity of saving means how much money people save from their income instead of spending it. When income goes up, savings usually go up too.

🎯 Exam Tip: Remember that saving is the residual of income after consumption and has a direct, but not necessarily proportional, relationship with income.

Question 5. What do you mean by average propensity to save and marginal propensity to save ?
Answer: Saving is primarily divided into two main categories:
(i) Average Propensity to Save (APS): This is the ratio of total savings to total income. It indicates, on average, what proportion of a person's or an economy's income is saved. APS is generally less than 1, but it can be negative if consumption exceeds income (meaning people are drawing from past savings or borrowing).
Mathematically, \( \text{APS} = \frac{S}{Y} = \frac{\text{Savings}}{\text{Income}} \)
(ii) Marginal Propensity to Save (MPS): This measures the ratio of the change in savings to the change in income. It tells us how much of an additional unit of income is saved. MPS is a crucial component in understanding the multiplier effect in an economy.
Mathematically, \( \text{MPS} = \frac{\Delta S}{\Delta Y} = \frac{\text{Change in Saving}}{\text{Change in Income}} \)
The sum of APS and MPS is always 1, similar to MPC and MPS, showing that any extra income is either consumed or saved.
In simple words: APS is the total part of your income you save, while MPS is the part of any *new* income you save.

🎯 Exam Tip: Ensure you know the formulas for both APS and MPS, and understand that APS can be negative, unlike MPS which is always positive.

Question 6. Describe the importance of consumption propensity in economic analysis.
Answer: Consumption propensity is highly important in economic analysis for several reasons:
1. It helps in better understanding of the business cycles. By studying consumption patterns, economists can predict economic downturns or upturns more accurately.
2. A high consumption propensity contributes to maintaining a high level of employment. Increased spending drives demand, prompting businesses to produce more and hire more workers.
3. It helps maintain economic stability. Predictable consumption patterns allow for better planning and policy-making by governments and businesses. A stable consumption base ensures continuous demand for goods and services.
In simple words: Understanding how people spend their money helps us know about business ups and downs, keeps jobs stable, and helps the economy stay balanced.

🎯 Exam Tip: When discussing the importance of economic concepts, always link them to broader macroeconomic goals like employment, stability, and growth.

Question 8. Explain Anticipated Saving.
Answer: Anticipated saving, also known as ex-ante saving, is the amount of money that individuals or households *plan* to save from their income in an economy. It represents the desired or intended saving that people expect to make. However, it's not always certain that this planned saving will equal the actual saving realized in the economy, as real-world conditions can change. It is a forward-looking measure of savings intentions.
In simple words: Anticipated saving is the amount of money people plan to save from their earnings.

🎯 Exam Tip: Highlight that anticipated saving is about *intentions* or *plans* rather than actual outcomes, and it can differ from ex-post (actual) saving.

Question 9. What- meant by anticipated Investment ?
Answer: Anticipated investment, also known as ex-ante investment, refers to the amount that businesses or individuals *plan* to invest in new capital goods or assets. This is the desired level of investment that is expected to occur in the future based on current economic forecasts and profit expectations. It signifies the spending that is hoped to lead to increased productive capacity. Like saving, anticipated investment might not always equal actual investment due to changing market conditions.
In simple words: Anticipated investment is the amount of money businesses plan to spend on new equipment or buildings for the future.

🎯 Exam Tip: Contrast anticipated investment with actual investment to show the difference between planned economic activity and what truly happens.

Question 10. What is meant by actual investment ?
Answer: Actual investment, also known as ex-post investment, refers to the total spending that actually occurs in an economy on new capital goods, new assets, and changes in inventory. This is the realized investment that takes place over a period. In a capital market, any actual increase in capital stock is considered actual investment. Importantly, actual investment is always equal to actual saving in an economy, even if planned investment and planned saving differ. This equality is a fundamental accounting identity.
In simple words: Actual investment is the money businesses really spent on new things and assets. It always matches the actual money saved by people.

🎯 Exam Tip: Stress the accounting identity that actual investment always equals actual saving, which is distinct from the equilibrium condition where planned investment equals planned saving.

Question 11. What is meant by actual savings?
Answer: Actual savings, or ex-post savings, refers to the amount of income that is genuinely left over after consumption at a given income level. It is the real amount saved by individuals and households. This figure includes both planned savings and any unplanned savings or dissavings that might have occurred. Essentially, it is the final portion of income that was not spent on consumption. This can also be considered as actual investment in an economy.
In simple words: Actual savings is the real money saved from income after all spending, and it includes both planned and unplanned savings.

🎯 Exam Tip: Remember that actual savings is an outcome measure, reflecting what actually happened to income after consumption, regardless of initial plans.

Question 12. What is Investment ?
Answer: Investment, in economics, refers to the expenditure made to acquire new capital goods and increase an economy's productive capacity. This includes things like purchasing new machines, constructing factories or houses, and adding to stock inventory. Investment also encompasses the necessary equipment for production and any increase in stock. It is a critical component of aggregate demand and drives economic growth by enhancing future production possibilities.
In simple words: Investment means spending money to buy new machines, build factories, or increase stock, so you can produce more in the future.

🎯 Exam Tip: Define investment in terms of increasing productive capacity, not just buying financial assets. Emphasize its role in economic growth.

Question 14. What do you mean by Marginal efficiency of capital?
Answer: Marginal Efficiency of Capital (MEC) is the expected rate of return from an additional unit of capital asset over its cost. To increase employment and fulfill growing needs in an economy, investment is essential. The profit earned from each additional unit of capital is what MEC measures. It helps businesses decide whether to invest in a new project by comparing the expected return with the cost of borrowing. It is a key determinant of investment levels.
In simple words: MEC is the extra profit a business expects to get by investing in one more unit of capital.

🎯 Exam Tip: MEC is about *expected* future returns. Its comparison with the market interest rate determines whether an investment project is undertaken.

Question 15. What are the factors affecting investment in an economy ? Explain.
Answer: Investment in an economy is primarily affected by two major factors:
1. Marginal Efficiency of Capital (MEC): This is the expected rate of return from an additional unit of capital. If the expected returns are high, businesses are more motivated to invest. The demand for investment is low when the interest rate is high and vice-versa. Therefore, the MEC curve has a negative slope, meaning higher expected returns are needed to justify more investment.
2. Rate of Interest: This is the cost of borrowing money to finance an investment. When the rate of interest is high, the cost of capital increases, making investment less attractive. Consequently, investment declines. Conversely, lower interest rates encourage more investment by reducing borrowing costs. Businesses compare the MEC with the interest rate to make investment decisions.
In simple words: Investment is affected by how much profit a company expects to make (MEC) and how much it costs to borrow money (interest rate). High expected profit and low interest rates lead to more investment.

🎯 Exam Tip: Always analyze investment decisions by considering both the expected profitability (MEC) and the cost of funding (interest rate). These two factors are inversely related.

Question 16. Explain marginal efficiency of capital with MEC curve.
Answer: The Marginal Efficiency of Capital (MEC) refers to the expected rate of return on an additional unit of capital. When investment (denoted along the X-axis) increases from \( OI_1 \) to \( OI_2 \), the marginal efficiency of capital (MEC) decreases from \( OP_1 \) to \( OP_2 \). This means that with each additional unit of investment, the expected profitability or return from that investment goes down. The MEC curve graphically represents this inverse relationship between investment and the MEC, typically sloping downwards from left to right. This downward slope occurs because, beyond a certain point, increased production leads to higher demand for capital and potentially lower expected yields.

In simple words: The MEC curve shows that as businesses invest more money, the extra profit they expect to get from each new investment usually goes down.

🎯 Exam Tip: When drawing the MEC curve, ensure it slopes downwards, showing the inverse relationship between investment and the expected rate of return, and correctly label the axes.

Question 17. Explain graphically the consumption function.
Answer: The consumption function graphically represents the relationship between total consumption (C) and total disposable income (Yd) in an economy. It shows that as income increases, consumption also increases, but usually not by the same proportion. The consumption function typically starts above the origin, indicating some level of autonomous consumption even when income is zero, and then slopes upwards. It is often plotted against a 45-degree line, which represents points where consumption equals income. The slope of the consumption function is determined by the Marginal Propensity to Consume (MPC).

In simple words: The consumption function graph shows that as people's income increases, their spending also goes up, but there's always some basic spending even if they earn nothing.

🎯 Exam Tip: When drawing, make sure the consumption line starts above zero income (autonomous consumption) and has a flatter slope than the 45-degree income line (because MPC is less than 1).

Question 18. What do you mean by anticipated and anticipated Investment?
Answer: Anticipated saving, also known as ex-ante saving, refers to the savings that individuals or households *plan* to make during a specific period. It reflects their intentions to set aside a portion of their income. Anticipated investment, or ex-ante investment, refers to the investment that businesses *plan* to undertake. This occurs when businessmen expect their sales or services to increase, leading them to plan to expand their stock or capital assets. Both are forward-looking concepts, representing intentions rather than actual outcomes.
In simple words: Anticipated saving is the money people plan to save, and anticipated investment is the money businesses plan to invest, often because they expect more sales.

🎯 Exam Tip: Remember that both anticipated saving and investment are about *plans* and *expectations*, which may not always match actual outcomes in the economy.

Question 19. State the reasons for reduction of capital Marginal Productivity with rise in investment.
Answer: The marginal productivity of capital tends to decrease as investment rises for two main reasons:
1. As production increases, the demand for capital also increases. However, beyond a certain point, the anticipated profit from each additional unit of capital begins to decrease. This happens because more production can lead to a decrease in the price of the goods produced, reducing overall profitability.
2. When the demand for capital goods increases significantly, their supply price also tends to rise. This increased cost of capital goods then leads to a higher price of production, which in turn reduces the marginal productivity or profitability of further investment. This is essentially the law of diminishing returns at play.
In simple words: As you invest more in capital, the extra profit you get from each new investment goes down because increased production can lower prices, and more demand for capital can make it more expensive.

🎯 Exam Tip: Link the reduction in marginal productivity of capital to the law of diminishing returns and the supply-demand dynamics of capital goods.

Question 20. Explain the investment decision taken by an invester.
Answer: An investor makes investment decisions by comparing two key factors: the rate of interest and the marginal efficiency of capital (MEC). The rate of interest represents the cost of borrowing funds for the investment, or the opportunity cost of using one's own funds. The MEC represents the expected rate of return or profitability from the investment. An investor will typically undertake an investment project only if the MEC is greater than or equal to the rate of interest. If the expected return (MEC) is lower than the cost of borrowing (interest rate), the investment is not considered worthwhile. This careful comparison helps investors maximize their returns.
In simple words: An investor decides whether to invest by comparing the expected profit from the investment with the cost of borrowing money. If the profit is higher, they invest.

🎯 Exam Tip: Emphasize the direct comparison between MEC and the interest rate as the core of an investment decision, with MEC needing to exceed or equal the interest rate for the investment to be profitable.

RBSE Class 12 Economics Chapter 20 Numerical Questions

Question 1. If average consumption propensity (APC) is 0.2, 0.4, 0.7, then find average savings propensity (APS).
Answer: The relationship between Average Propensity to Consume (APC) and Average Propensity to Save (APS) is that their sum is always equal to 1. This is because any portion of income is either consumed or saved.
\( \text{APS} = 1 - \text{APC} \)
Using this formula for the given values:
(i) If APC = 0.2, then \( \text{APS} = 1 - 0.2 = 0.8 \)
(ii) If APC = 0.4, then \( \text{APS} = 1 - 0.4 = 0.6 \)
(iii) If APC = 0.7, then \( \text{APS} = 1 - 0.7 = 0.3 \)
Thus, as consumption propensity decreases, savings propensity increases, showing an inverse relationship between the two.
In simple words: Since APC + APS always equals 1, you can find APS by subtracting the given APC from 1 for each case.

🎯 Exam Tip: Always remember the fundamental identity \( \text{APC} + \text{APS} = 1 \) for quick calculations in related problems.

Question 2. In a balanced economy, find the autonomous consumption expenditure from the following data :
National Income = 500
MPS = 0.30
Investment Expenditure = 100
Answer: First, we need to find the Marginal Propensity to Consume (MPC) using the relationship \( \text{MPC} = 1 - \text{MPS} \).
\( \text{MPC} = 1 - 0.30 = 0.70 \)
In a balanced economy, National Income (Y) equals Consumption (C) plus Investment (I):
\( Y = C + I \)
We also know that Consumption (C) can be expressed as \( C = \text{Autonomous Consumption} + (\text{MPC} \times Y) \). Let 'a' be the autonomous consumption.
So, \( Y = a + (\text{MPC} \times Y) + I \)
Substitute the given values:
\( 500 = a + (0.70 \times 500) + 100 \)
\( 500 = a + 350 + 100 \)
\( 500 = a + 450 \)
Now, solve for 'a':
\( a = 500 - 450 \)
\( a = 50 \)
Therefore, the autonomous consumption expenditure is 50. This is the level of consumption that occurs even when income is zero.
In simple words: First, find MPC using \( 1 - \text{MPS} \). Then, use the equilibrium equation \( Y = C + I \) and the consumption function \( C = a + \text{MPC} \times Y \) to find 'a', which is the autonomous consumption.

🎯 Exam Tip: Remember that in equilibrium, total income equals total expenditure (consumption + investment). Autonomous consumption is the intercept of the consumption function.

Question 3. Find the investment expenditure from the following data if the economy is in equilibrium :
National Income = Rs.1000
MPS = 0.20
Autonomous Consumption Expenditure = Rs.100
Answer: First, calculate the Marginal Propensity to Consume (MPC) using the given MPS.
\( \text{MPC} = 1 - \text{MPS} \)
\( \text{MPC} = 1 - 0.20 = 0.80 \)
Now, use the consumption function to find total consumption (C) at the given National Income (Y).
Consumption Function: \( C = \text{Autonomous Consumption} + (\text{MPC} \times Y) \)
\( C = 100 + (0.80 \times 1000) \)
\( C = 100 + 800 \)
\( C = 900 \)
In equilibrium, National Income (Y) equals the sum of Consumption (C) and Investment (I).
\( Y = C + I \)
Substitute the values:
\( 1000 = 900 + I \)
Solve for Investment (I):
\( I = 1000 - 900 \)
\( I = 100 \)
So, the investment expenditure in this economy is Rs.100. This calculation demonstrates how investment balances saving in an equilibrium.
In simple words: First, calculate MPC from MPS. Then, find total consumption using the consumption function. Finally, subtract total consumption from national income to get the investment.

🎯 Exam Tip: Always remember the equilibrium condition \( Y = C + I \) and the consumption function \( C = a + bY \) as key tools for solving such problems.

Question 5. Find MPC from the following data if economy is in a balance mode :
National Income = Rs.1500
Autonomous consumption Expenditure = Rs.300
Investment Expenditure = Rs.300
Answer: In an economy in equilibrium, National Income (Y) equals Consumption (C) plus Investment (I).
\( Y = C + I \)
We also know the consumption function: \( C = \text{Autonomous Consumption (a)} + (\text{MPC} \times Y) \).
Let MPC be 'b'. So, \( C = a + bY \).
Substitute this into the equilibrium equation:
\( Y = a + bY + I \)
Now, plug in the given values:
National Income \( (Y) = 1500 \)
Autonomous Consumption \( (a) = 300 \)
Investment Expenditure \( (I) = 300 \)
\( 1500 = 300 + (b \times 1500) + 300 \)
\( 1500 = 600 + 1500b \)
Subtract 600 from both sides:
\( 1500 - 600 = 1500b \)
\( 900 = 1500b \)
Now, solve for 'b' (MPC):
\( b = \frac{900}{1500} \)
\( b = 0.6 \)
Therefore, the Marginal Propensity to Consume (MPC) is 0.6. This means for every extra unit of income, 60% is spent on consumption.
In simple words: Use the equilibrium formula \( Y = a + bY + I \), where 'a' is autonomous consumption and 'b' is MPC. Plug in the numbers and solve for 'b'.

🎯 Exam Tip: Ensure you correctly set up the equilibrium equation incorporating the consumption function to solve for unknown variables like MPC.

Question 6. Find autonomous consumption expenditure from the given data, if economy is in equilibrium :
National Income = Rs.1200
MPS = 0.20
Investment Expenditure = Rs.100
Answer: First, we need to calculate the Marginal Propensity to Consume (MPC) using the given MPS.
\( \text{MPC} = 1 - \text{MPS} \)
\( \text{MPC} = 1 - 0.20 = 0.80 \)
In equilibrium, National Income (Y) equals Consumption (C) plus Investment (I):
\( Y = C + I \)
We also know the consumption function: \( C = \text{Autonomous Consumption (a)} + (\text{MPC} \times Y) \).
Substitute this into the equilibrium equation:
\( Y = a + (\text{MPC} \times Y) + I \)
Now, plug in the given values:
National Income \( (Y) = 1200 \)
MPC \( = 0.80 \)
Investment Expenditure \( (I) = 100 \)
\( 1200 = a + (0.80 \times 1200) + 100 \)
\( 1200 = a + 960 + 100 \)
\( 1200 = a + 1060 \)
Now, solve for 'a' (Autonomous Consumption):
\( a = 1200 - 1060 \)
\( a = 140 \)
Therefore, the autonomous consumption expenditure is Rs.140. This is the minimum level of consumption in the economy, regardless of income.
In simple words: Calculate MPC first. Then, use the equilibrium equation \( Y = a + \text{MPC} \times Y + I \). Plug in the known values and solve for 'a', which is the autonomous consumption.

🎯 Exam Tip: Always start by converting MPS to MPC if necessary, then substitute known values into the equilibrium identity to find the unknown variable.

Question 7. Find MPC from the following data if the economy is in equilibrium:
(i) Balanced income = Rs.350
(ii) Consumption expenditure on zero income level = Rs.20
(iii) Investment expenditure = Rs.50
Answer: We are given the equilibrium national income, autonomous consumption, and investment. We need to find the Marginal Propensity to Consume (MPC).
The equilibrium condition is: \( Y = C + I \)
The consumption function is: \( C = a + bY \), where 'a' is autonomous consumption and 'b' is MPC.
Substitute the consumption function into the equilibrium equation:
\( Y = a + bY + I \)
Now, plug in the given values:
Balanced income \( (Y) = 350 \)
Autonomous consumption \( (a) = 20 \)
Investment expenditure \( (I) = 50 \)
\( 350 = 20 + (b \times 350) + 50 \)
\( 350 = 70 + 350b \)
Subtract 70 from both sides:
\( 350 - 70 = 350b \)
\( 280 = 350b \)
Solve for 'b' (MPC):
\( b = \frac{280}{350} \)
\( b = 0.8 \)
Therefore, the Marginal Propensity to Consume (MPC) is 0.8. This means that 80% of any additional income is spent on consumption.
In simple words: Use the formula \( Y = a + \text{MPC} \times Y + I \), where 'a' is consumption at zero income. Put in the given numbers and calculate MPC.

🎯 Exam Tip: Make sure to identify 'consumption expenditure on zero income level' as autonomous consumption (a) in the consumption function.

Question 8. If average saving propensity (APS) = 0.4, 0.6, 0.9, find average consumption propensity (APC).
Answer: The relationship between Average Propensity to Consume (APC) and Average Propensity to Save (APS) is that their sum always equals 1. This means:
\( \text{APC} = 1 - \text{APS} \)
Using this formula for each given APS value:
(i) If APS = 0.4, then \( \text{APC} = 1 - 0.4 = 0.6 \)
(ii) If APS = 0.6, then \( \text{APC} = 1 - 0.6 = 0.4 \)
(iii) If APS = 0.9, then \( \text{APC} = 1 - 0.9 = 0.1 \)
These calculations show that as the propensity to save increases, the propensity to consume decreases, which is an expected economic outcome.
In simple words: To find APC, simply subtract each given APS value from 1, as APC + APS always equals 1.

🎯 Exam Tip: Remember the identity \( \text{APC} + \text{APS} = 1 \) as a quick method for converting between consumption and saving propensities.

Question 9. If marginal propensity of consumption (MPC) is 0.45, 0.65, 0.75, find marginal propensity of savings (MPS).
Answer: The relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is that their sum always equals 1. This is a fundamental identity in Keynesian economics.
\( \text{MPS} = 1 - \text{MPC} \)
Using this formula for each given MPC value:
(i) If MPC = 0.45, then \( \text{MPS} = 1 - 0.45 = 0.55 \)
(ii) If MPC = 0.65, then \( \text{MPS} = 1 - 0.65 = 0.35 \)
(iii) If MPC = 0.75, then \( \text{MPS} = 1 - 0.75 = 0.25 \)
These results indicate how much of each additional unit of income is saved rather than consumed, showing that as MPC increases, MPS decreases proportionally.
In simple words: You can find MPS by subtracting each MPC value from 1, because MPC + MPS always equals 1.

🎯 Exam Tip: This relationship \( \text{MPC} + \text{MPS} = 1 \) is crucial for many macroeconomic calculations, especially those involving the multiplier effect.

Question 10. If autonomous income is Rs.500 and consumption income is Rs.300, then find APC and APS.
Answer: We are given:
Income \( (Y) = \text{Rs.500} \)
Consumption \( (C) = \text{Rs.300} \)
To find the Average Propensity to Consume (APC), we use the formula:
\( \text{APC} = \frac{C}{Y} \)
\( \text{APC} = \frac{300}{500} \)
\( \text{APC} = 0.6 \)
To find the Average Propensity to Save (APS), we can first calculate Saving \( (S) \) and then use the formula for APS, or use the identity \( \text{APS} = 1 - \text{APC} \).
Saving \( (S) = Y - C \)
\( S = 500 - 300 \)
\( S = 200 \)
Using the APS formula:
\( \text{APS} = \frac{S}{Y} \)
\( \text{APS} = \frac{200}{500} \)
\( \text{APS} = 0.4 \)
Alternatively, using the identity:
\( \text{APS} = 1 - \text{APC} \)
\( \text{APS} = 1 - 0.6 \)
\( \text{APS} = 0.4 \)
Both methods yield the same result. This shows that 60% of the income is consumed, and 40% is saved.
In simple words: Divide consumption by income to get APC. Then, subtract APC from 1 to find APS.

🎯 Exam Tip: Remember that "autonomous income" in the question likely refers to the total income given, not income independent of consumption. Always define your terms and use the standard APC/APS formulas.

Question 11. If autonomous income is Rs. 10,000, savings is Rs. 3,000, then find APC and APS.
Answer:
Given:
Income \( Y = \) Rs. 10,000
Savings \( S = \) Rs. 3,000
First, we calculate Consumption \( C \). We know that Income \( Y = \) Consumption \( C + \) Savings \( S \).
So, \( C = Y - S \)
\( C = 10,000 - 3,000 \)
\( C = 7,000 \) Rs.
Now, we calculate Average Propensity to Consume (APC). This is the ratio of total consumption to total income.
\( APC = \frac{\text{Consumption (C)}}{\text{Income (Y)}} \)
\( APC = \frac{7,000}{10,000} \)
\( APC = 0.7 \)
Next, we calculate Average Propensity to Save (APS). This is the ratio of total savings to total income.
\( APS = \frac{\text{Savings (S)}}{\text{Income (Y)}} \)
\( APS = \frac{3,000}{10,000} \)
\( APS = 0.3 \)
Alternatively, we know that the sum of APC and APS is always 1.
So, \( APS = 1 - APC \)
\( APS = 1 - 0.7 \)
\( APS = 0.3 \)
In simple words: We use the total income and total savings to find out how much money was spent. Then, we calculate the average part of income spent (APC) and the average part saved (APS). We also know that these two parts always add up to one, which helps to check our work.

🎯 Exam Tip: Remember the basic identities: \( Y = C + S \) and \( APC + APS = 1 \). These are fundamental for solving problems related to consumption and saving propensities.

Question 12. Calculate MPC and MPS from the following table :
Income (Y) | Consumption (C)
1000 | 600
1500 | 900
Answer:
From the given table, we can find the changes in income and consumption.
Change in Income \( \Delta Y = 1500 - 1000 = 500 \)
Change in Consumption \( \Delta C = 900 - 600 = 300 \)
Now, we calculate Marginal Propensity to Consume (MPC). This measures how much consumption changes when income changes.
\( MPC = \frac{\text{Change in Consumption }(\Delta C)}{\text{Change in Income }(\Delta Y)} \)
\( MPC = \frac{300}{500} \)
\( MPC = 0.6 \)
Next, we calculate Marginal Propensity to Save (MPS). We know that the sum of MPC and MPS is always 1.
So, \( MPS = 1 - MPC \)
\( MPS = 1 - 0.6 \)
\( MPS = 0.4 \)
In simple words: We look at how much more money is spent when income goes up by a certain amount. We divide the extra spending by the extra income to get MPC. Then, since MPC and MPS always add up to one, we can easily find MPS. These values show how sensitive spending and saving are to changes in income.

🎯 Exam Tip: Always clearly show the calculation of \( \Delta Y \) and \( \Delta C \) before computing MPC, especially in numerical problems. This ensures you get partial credit even if the final answer is incorrect.

Question 13. Find MPC from the given table.
Income (Y) | Savings (S) | MPS = \( \frac{\Delta S}{\Delta Y} \) | MPC = \( 1 - MPS \)
20,000 | 5,000 | — | —
25,000 | 7,000 | = 0.4 | 1 - 0.4 = 0.6
Answer:
To find MPC, we first need to calculate the change in income (\( \Delta Y \)) and the change in savings (\( \Delta S \)).
From the table:
Initial Income \( Y_1 = 20,000 \)
Final Income \( Y_2 = 25,000 \)
Initial Savings \( S_1 = 5,000 \)
Final Savings \( S_2 = 7,000 \)
Change in Income \( \Delta Y = Y_2 - Y_1 = 25,000 - 20,000 = 5,000 \)
Change in Savings \( \Delta S = S_2 - S_1 = 7,000 - 5,000 = 2,000 \)
Now, we calculate Marginal Propensity to Save (MPS). This tells us how much of an extra rupee of income is saved.
\( MPS = \frac{\Delta S}{\Delta Y} \)
\( MPS = \frac{2,000}{5,000} \)
\( MPS = 0.4 \)
Finally, we calculate Marginal Propensity to Consume (MPC). We use the relationship that MPC and MPS sum to 1.
\( MPC = 1 - MPS \)
\( MPC = 1 - 0.4 \)
\( MPC = 0.6 \)
In simple words: We find how much income changed and how much savings changed. We use these changes to calculate MPS. Then, we subtract MPS from 1 to find MPC, which tells us how much more people spend when their income goes up. This helps us understand spending habits.

🎯 Exam Tip: When given changes in income and savings, first calculate MPS, then use \( MPC = 1 - MPS \) to find MPC. This is usually the most straightforward approach.

Question 14. Complete the following table :
Income (Y) | Savings (S) | MPC | APC
0 | -20 | |
50 | -10 | |
100 | 0 | |
150 | 30 | |
200 | 60 | |
Answer:
We can complete the table by first calculating Consumption \( C = Y - S \), then MPC = \( \frac{\Delta C}{\Delta Y} \), and finally APC = \( \frac{C}{Y} \).
Let's find the values row by row:
For Income (Y) = 0, Savings (S) = -20:
Consumption \( C = 0 - (-20) = 20 \)
APC = \( \frac{20}{0} \) (Undefined, represented as -)
MPC: (Cannot calculate for first row without previous data)
For Income (Y) = 50, Savings (S) = -10:
Consumption \( C = 50 - (-10) = 60 \)
APC = \( \frac{60}{50} = 1.2 \)
\( \Delta Y = 50 - 0 = 50 \), \( \Delta C = 60 - 20 = 40 \). So, \( MPC = \frac{40}{50} = 0.8 \)
For Income (Y) = 100, Savings (S) = 0:
Consumption \( C = 100 - 0 = 100 \)
APC = \( \frac{100}{100} = 1 \)
\( \Delta Y = 100 - 50 = 50 \), \( \Delta C = 100 - 60 = 40 \). So, \( MPC = \frac{40}{50} = 0.8 \)
For Income (Y) = 150, Savings (S) = 30:
Consumption \( C = 150 - 30 = 120 \)
APC = \( \frac{120}{150} = 0.8 \)
\( \Delta Y = 150 - 100 = 50 \), \( \Delta C = 120 - 100 = 20 \). So, \( MPC = \frac{20}{50} = 0.4 \)
For Income (Y) = 200, Savings (S) = 60:
Consumption \( C = 200 - 60 = 140 \)
APC = \( \frac{140}{200} = 0.7 \)
\( \Delta Y = 200 - 150 = 50 \), \( \Delta C = 140 - 120 = 20 \). So, \( MPC = \frac{20}{50} = 0.4 \)
Here is the completed table:

🎯 Exam Tip: Remember that APC can be greater than 1 at low income levels (indicating dissavings), and it decreases as income increases. MPC, on the other hand, typically remains relatively constant or decreases slightly.

Question 15. Complete the following table :
Income (Y) | Savings (S) | MPC | APS
0 | -12 | |
20 | -6 | |
40 | 0 | |
60 | 6 | |
Answer:
We need to calculate Consumption \( C = Y - S \), then MPC = \( \frac{\Delta C}{\Delta Y} \), and APS = \( \frac{S}{Y} \).
Let's find the values row by row:
For Income (Y) = 0, Savings (S) = -12:
Consumption \( C = 0 - (-12) = 12 \)
APS = \( \frac{-12}{0} \) (Undefined, represented as -)
MPC: (Cannot calculate for first row without previous data)
For Income (Y) = 20, Savings (S) = -6:
Consumption \( C = 20 - (-6) = 26 \)
APS = \( \frac{-6}{20} = -0.3 \)
\( \Delta Y = 20 - 0 = 20 \), \( \Delta C = 26 - 12 = 14 \). So, \( MPC = \frac{14}{20} = 0.7 \)
For Income (Y) = 40, Savings (S) = 0:
Consumption \( C = 40 - 0 = 40 \)
APS = \( \frac{0}{40} = 0 \)
\( \Delta Y = 40 - 20 = 20 \), \( \Delta C = 40 - 26 = 14 \). So, \( MPC = \frac{14}{20} = 0.7 \)
For Income (Y) = 60, Savings (S) = 6:
Consumption \( C = 60 - 6 = 54 \)
APS = \( \frac{6}{60} = 0.1 \)
\( \Delta Y = 60 - 40 = 20 \), \( \Delta C = 54 - 40 = 14 \). So, \( MPC = \frac{14}{20} = 0.7 \)
Here is the completed table:

🎯 Exam Tip: Note that MPS is constant here (0.3), meaning MPC is also constant (0.7). This indicates a linear consumption function, a common assumption in basic macroeconomic models.

Question 16. Complete the following table, given the consumption function parameters are autonomous consumption \( a = 90 \) and marginal propensity to consume \( b = 0.6 \).
Income (Y) | MPC | Savings (S = Y-C) | APS = S/Y | Consumption (C)
0 | | | |
100 | | | |
200 | | | |
300 | | | |
Answer:
The consumption function can be written as \( C = a + bY \).
Given autonomous consumption \( a = 90 \) and marginal propensity to consume \( b = 0.6 \).
So, the consumption function is \( C = 90 + 0.6Y \).
MPC is constant at 0.6 as per the given \( b \).
We can calculate Consumption \( C \) using the function, then Savings \( S = Y - C \), and finally APS = \( \frac{S}{Y} \).
Let's find the values row by row:
For Income (Y) = 0:
Consumption \( C = 90 + 0.6(0) = 90 \)
Savings \( S = 0 - 90 = -90 \)
MPC = \( - \) (Cannot calculate for first row in this context)
APS = \( \frac{-90}{0} \) (Undefined, represented as -)
For Income (Y) = 100:
Consumption \( C = 90 + 0.6(100) = 90 + 60 = 150 \)
Savings \( S = 100 - 150 = -50 \)
MPC = \( 0.6 \)
APS = \( \frac{-50}{100} = -0.5 \)
For Income (Y) = 200:
Consumption \( C = 90 + 0.6(200) = 90 + 120 = 210 \)
Savings \( S = 200 - 210 = -10 \)
MPC = \( 0.6 \)
APS = \( \frac{-10}{200} = -0.05 \)
For Income (Y) = 300:
Consumption \( C = 90 + 0.6(300) = 90 + 180 = 270 \)
Savings \( S = 300 - 270 = 30 \)
MPC = \( 0.6 \)
APS = \( \frac{30}{300} = 0.1 \)
Here is the completed table:

🎯 Exam Tip: When given a consumption function \( C = a + bY \), remember that 'a' represents autonomous consumption (consumption at zero income), and 'b' is the constant marginal propensity to consume (MPC).

Question 17. Complete the given table :
Income (Y) | Consumption (C) | MPC | APS
0 | 40 | |
— | 120 | 0.8 |
— | 200 | 0.8 |
— | 280 | 0.8 |
Answer:
We are given Consumption (C), and MPC is constant at 0.8 for the latter rows. We need to find the missing Income (Y) values and APS.
Let's work through the table:
For Income (Y) = 0, Consumption (C) = 40:
Savings \( S = Y - C = 0 - 40 = -40 \)
APS = \( \frac{-40}{0} \) (Undefined, represented as -)
MPC: (Cannot calculate for first row without previous data)
To find the next Income (Y) value:
From \( C_1 = 40 \) to \( C_2 = 120 \), \( \Delta C = 120 - 40 = 80 \).
Since \( MPC = \frac{\Delta C}{\Delta Y} \), and \( MPC = 0.8 \), we can find \( \Delta Y \).
\( 0.8 = \frac{80}{\Delta Y} \)
\( \Delta Y = \frac{80}{0.8} = 100 \).
So, \( Y_2 = Y_1 + \Delta Y = 0 + 100 = 100 \).
Savings \( S_2 = Y_2 - C_2 = 100 - 120 = -20 \)
APS = \( \frac{-20}{100} = -0.2 \)
To find the third Income (Y) value:
From \( C_2 = 120 \) to \( C_3 = 200 \), \( \Delta C = 200 - 120 = 80 \).
Again, \( \Delta Y = \frac{80}{0.8} = 100 \).
So, \( Y_3 = Y_2 + \Delta Y = 100 + 100 = 200 \).
Savings \( S_3 = Y_3 - C_3 = 200 - 200 = 0 \)
APS = \( \frac{0}{200} = 0 \)
To find the fourth Income (Y) value:
From \( C_3 = 200 \) to \( C_4 = 280 \), \( \Delta C = 280 - 200 = 80 \).
Again, \( \Delta Y = \frac{80}{0.8} = 100 \).
So, \( Y_4 = Y_3 + \Delta Y = 200 + 100 = 300 \).
Savings \( S_4 = Y_4 - C_4 = 300 - 280 = 20 \)
APS = \( \frac{20}{300} \approx 0.0667 \) (Rounded to 0.06 as per source)
Here is the completed table:

🎯 Exam Tip: When MPC is constant, it implies a linear relationship between consumption and income. This allows you to find missing income values by using the \( \Delta C \) and MPC formula.

Question 18. Complete the given table :
Income | MPC | Saving | APC
0 | | -30 |
100 | 0.75 | -5 |
200 | 0.75 | 20 |
300 | 0.75 | 45 |
Answer:
We are given Income (Y), MPC (which is constant at 0.75), and Savings (S). We need to find Consumption \( C \), and APC.
From \( MPC = 0.75 \), we know Marginal Propensity to Save (MPS) = \( 1 - MPC = 1 - 0.75 = 0.25 \).
Let's work through the table:
For Income (Y) = 0, Savings (S) = -30:
Consumption \( C = Y - S = 0 - (-30) = 30 \)
APC = \( \frac{30}{0} \) (Undefined, represented as -)
MPC: (Cannot calculate for first row in this context)
For Income (Y) = 100, Savings (S) = -5:
Consumption \( C = Y - S = 100 - (-5) = 105 \)
APC = \( \frac{105}{100} = 1.05 \)
MPC is given as 0.75
For Income (Y) = 200, Savings (S) = 20:
Consumption \( C = Y - S = 200 - 20 = 180 \)
APC = \( \frac{180}{200} = 0.90 \)
MPC is given as 0.75
For Income (Y) = 300, Savings (S) = 45:
Consumption \( C = Y - S = 300 - 45 = 255 \)
APC = \( \frac{255}{300} = 0.85 \)
MPC is given as 0.75
Here is the completed table:

🎯 Exam Tip: Note that in this table, MPS is also constant (0.25). This again points to a linear consumption and saving function where MPC and MPS do not change with income.

Question 20. The income created in an economy is double the autonomous investment. Find out the value of MPS and MPC.
Answer:
Given that the income created in an economy (\( \Delta Y \)) is double the autonomous investment (\( \Delta I \)).
This relationship implies that the Investment Multiplier (\( K \)) is 2. The multiplier shows how much total income changes when there is an initial change in investment.
The formula for the Multiplier is: \( K = \frac{\Delta Y}{\Delta I} \)
Since \( \Delta Y = 2 \times \Delta I \), then \( \frac{\Delta Y}{\Delta I} = 2 \).
Therefore, the Multiplier \( K = 2 \).
We also know the relationship between the Multiplier (\( K \)) and Marginal Propensity to Save (MPS): \( K = \frac{1}{MPS} \).
So, we can set up the equation:
\( 2 = \frac{1}{MPS} \)
Now, we solve for MPS:
\( MPS = \frac{1}{2} \)
\( MPS = 0.5 \)
Finally, we find Marginal Propensity to Consume (MPC) using the fundamental relationship:
\( MPC + MPS = 1 \)
So, \( MPC = 1 - MPS \)
\( MPC = 1 - 0.5 \)
\( MPC = 0.5 \)
In simple words: We are told that for every amount of new investment, the total income increases by double that amount. This means our economic multiplier is 2. Since the multiplier is linked to how much people save from extra income (MPS), we can find MPS. After that, we use the rule that MPC and MPS always add up to 1 to find MPC.

🎯 Exam Tip: Always remember the multiplier formula \( K = \frac{1}{1-MPC} \) or \( K = \frac{1}{MPS} \). If you can determine the multiplier from the given information, finding MPC and MPS becomes straightforward.