# NCERT Solutions Class 12 Economics National Income Determination and Multiplier

## National Income Determination and Multiplier Class 12 NCERT Solutions

Class 12 Economics students should refer to the following NCERT questions with answers for National Income Determination and Multiplier in standard 12. These NCERT Solutions with answers for Grade 12 Economics will come in exams and help you to score good marks

### National Income Determination and Multiplier NCERT Solutions Class 12

National Income Determination and Multiplier

Question 1. Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4000 crores. State whether the economy is in equilibrium or not (cite reasons).
Answer: As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption  = Rs 50 crore MPS = 0.2
So, MPC(b) = 1 – 0.2 = 0.8
(MPC = 1 – MPS)
AD =  + bY + I =  + bY
= 50 + 0.8Y
As we know, the equilibrium level of national income in two-sector model is determined where,
Y = 50 + 0.8Y
4000 = 50 + 0.8(4000)
4000 = 50 + 3200
4000 =3250
Hence, the economy is not in equilibrium.

Question 2. Explain ‘Paradox of Thrift’. [3-4 Marks]

1. The term thrift means savings and the paradox of thrift shows how an attempt by the economy as a whole to save more out of its current income will ultimately result in lower savings for the economy.

2. If all the people in the economy make an effort to save more, then the total savings of the community will not increase, on the contrary they will decrease. This is called the paradox of thrift.

3. Reasons for “Paradox of thrift” to operate:

(a) As we know that one person’s expenditure is another person’s income.

(b) If individual ‘A’ decides to save more by reducing his consumption expenditure, the income of individual ‘B’ will be less and individual ‘B’ in turn will spend less.

(c) Thus, if all individuals in the economy decide to save more, the income received byeach individual will be less and overall income will fall and also lower will be the total savings.

## Tags:

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