CBSE Class 12 Economics Determination of Income And Employment VBQs

MCQ Questions for NCERT Class 12 Economics Aggregate Demand, Aggregate Supply and Related Concepts

Question: According to the theory of Keynesian Economics,the value of the average propensity to consume can never be ……… .
(a) zero
(b) unity
(c) more than one
(d) less than one  

Answer: A

Question: If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be
(a) greater than 2
(b) less than 2
(c) equal to 2
(d) equal to 5 

Answer: A

Question: If Marginal Propensity to Save (MPS) is equal to zero, the value of investment multiplier will be .................... .
(a) 1
(b) 0
(c) ∞
(d) None of these 

Answer: c

Question: Suppose in a hypothetical economy, the income rises from` R.s.500 crores to ` R.s.600 crores. As a result, the consumption expenditure rises from` R.s.400 crores to ` R.s.500 crores. Marginal propensity to consume in such a case would be...... . (Choose the correct alternative)
(a) 0.8
(b) 0.4
(c) 1.0
(d) 0.6 

Answer: C

Question: If the value of Average Propensity to Consume (APC) is 0.8 and national income is `R.s. 4,000 crores, the value of savings will be ............ . (Choose the correct alternative)
(a) ` R.s.100 crores
(b) `R.s. 200 crores
(c) ` R.s.800 crores
(d) `R.s. 500 crores 

Answer: C

Question: Expenditure on Goods and Services =
(a) Government Expenditure + Investment Expenditure
(b) Consumption Expenditure + Government Consumption Expenditure
(c) Consumption Expenditure + Investment Expenditure 
(d) None of the above 

Answer: C

Question: In an open economy, aggregate demand is estimated as
(a) Private Consumption Expenditure + Net Exports
(b) Private Consumption Expenditure + Government Expenditure
(c) Private Consumption Expenditure + Government Expenditure + Net Exports
(d) Private Consumption Expenditure + Private Investment
Expenditure + Government Expenditure + Net Exports 

Answer: D

Question: When C function shoots from Y-axis, it indicates that  
(i) consumption is zero when income is zero
(ii) saving is negative when income is zero
(iii) consumption is positive when income is zero
(iv) saving is positive when income is zero Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i), (ii) and (iii)
(d) (ii), (iii) and (iv)  

Answer: B

Question: Which of the following statements is/are correct?
(i) Autonomous investment increases with increase in the level of income in an economy.
(ii) Induced investment changes with change in the rate of interest and income level in an economy.
Alternatives
(a) Both are true
(b)Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true 

Answer: D 

Question: When household consumption expenditure 
.= `R.s. 9,000, private investment expenditure
= `R.s. 7,000, government expenditure = ` R.s 12,000,
exports = ` R.s. 1,000 and imports = `R.s 3,000, the level of AD in an open economy will be
(a) `R.s.16,000
(b) ` R.s.26,000
(c) ` R.s.28,000
(d) ` R.s.29,000 

Answer: B

Question: Constant slope of S-line indicates that 
(a) S-line will be a straight line
(b) saving function will be non-linear
(c) saving function will be linear
(d) Both (a) and (c) 

Answer: D

Question: Perfectly elastic AS implies that 
(i) there is fuller utilisation of resources in the economy
(ii) there is unemployment of resources in the economy
(iii) there is excess capacity in the economy 
Alternatives
(a) Both (i) and (ii)
(b) Both (ii) and (iii)
(c) (i), (ii) and (iii)
(d) None of these 

Answer: B

Question: Propensity to save is the
(a) additional income that is not to be saved
(b) ratio of saving to income
(c) level of saving at which saving and consumption are equal
(d) tendency of the consumer towards higher saving 

Answer: B

Question: Which of the following is correct?
(a) APC =C/Y
(b) MPC = 1 – MPS
(c) APC + APS = 1
(d) All of these 

Answer: D

Question: Which of the given pair is correctly matched? 14 TABLE
Codes
(a) A-(i)
(b) B-(ii)
(c) C-(iii)
(d) D-(iv) 

Answer: D

Question: In Keynesian Economics, equilibrium level of income implies
(a) equilibrium level of output
(b) equilibrium level of employment
(c) Both (a) and (b)
(d) None of the above 

Answer: C

Question: If MPC = 0.5, the value of multiplier equals
(a) 2
(b) 1
(c) 5
(d) ∞ 

Answer: A

Question: With the increase in investment, MEC
(a) rises
(b) falls
(c) remains constant
(d) None of these 

Answer: B 

Question: 45 degree line in the context of equilibrium GDP is a (i) line of reference
(ii) line of identity
(iii) line of equality between AS and AD Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i) and (iii)
(d) None of the above 

Answer: C

Question: According to classical economists, real wage rate is ……… to the marginal productivity of labour. 
(a) equal
(b) more
(c) less
(d) None of these  

Answer: A

Question: If Autonomous Consumption (C) is greater than zero, it indicates that the level of national income in an economy will be
……… .
(a) rising
(b) falling
(c) constant
(d) Any of these 

Answer: D

Question: Saving is a ............. function of disposable income.
(a) positive
(b) negative
(c) constant
(d) None of these  

Answer: A

Question: Value of marginal propensity to consume varies from ……… to ……… .
(a) negative infinity, positive infinity
(b) one, positive infinity
(c) negative infinity, one
(d) zero, one  

Answer: D 

Question: Which of the following statements is/are correct?
(i) Autonomous investment is the expenditure incurred on creation of capital assets.
(ii) If the level of investment in an economy is greater than savings, the level of income will also rise so long as full employment is not achieved.
Alternatives
(a) Both are true
(b) Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true 

Answer: A 

Question: …… is equal tothe difference between ‘AD beyond full employment’ and ‘AD at full employment’.
(a) Recession
(b) Inflationary gap
(c) Deflationary gap
(d) None of these 

Answer: A 

Question: In case of excess demand, RBI …… the bank rate or interest rate which makes the credit dear.
(a) increases
(b) decreases
(c) deposit
(d) None of these   

Answer: B

Question: Which of the following can be used to correct the situation of deflationary gap?
(a) Increase in bank rate
(b) Increase in CRR
(c) Reduction in SLR
(d) Increase in margin requirement  

Answer: D

Question: Which of the following statements is/are true?
(a) Ex-ante savings is the actual level of savings in the economy.
(b) Ex-post investment is the planned investment at a given point of time.
(c) Ex-ante saving is always equal to ex-post savings.
(d) All of the above statements are false.  

Answer: C

Question: By increasing the tax burden on the producers, the government intends to
(a) correct the situation of deficient demand
(b) correct the situation of inflationary gap
(c) correct the situation of excess demand
(d) Both (b) and (c) 

Answer: D

Assertion-Reasoning MCQs

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is the not the correct explanation of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Both Assertion (A) and Reason (R) are false

Question: Assertion (A) AD is measured not as the sum total of goods but as the sum total of planned expenditure on the goods during an accounting year.
Reason (R) It is not possible to add up physical quantities of the goods and services planned to be purchased by the people. 

Answer: A 

Question: Assertion (A) The value of marginal propensity to consume can be greater than one.
Reason (R) The value of marginal propensity to save can be negative as well. 

Answer: D 

Question:Assertion (A) Full employment does not imply zero unemployment in an economy.
Reason (R) There are certain people in the economy who are both voluntary as well involuntary unemployed and there also exist certain level of natural unemployment in an economy. 

Answer: A 

Question: Assertion (A) The value of investment multiplier varies between one and infinity.
Reason (R) The minimum value of investment multiplier is one when MPC equals zero and maximum value equals infinity when MPC equals one. 

Answer: D

Question: Assertion (A) Saving function depicts linear relationship when MPS is found to be constant.
Reason (R) A linear saving function is a straight line savings function. The slope of a straight line is constant as indicated by constant MPS. 

Answer: A 

Question: Assertion (A) There is an inverse relationship between the value of investment multiplier and marginal propensity to consume.
Reason (R) Saving is a leakage in the circular flow of income.
Greater the savings, greater the leakage and lower the value of investment multiplier. 

Answer: A

Question: Assertion (A) The value of marginal propensity to  save can never be negative.
Reason (R) MPS is the ratio between additional saving and additional income which is always positive because of positive relationship between savings and income. 

Answer: A

DETERMINATION OF INCOME AND EMPLOYMENT

Question:  ―Investment demand includes financial investment like purchase of shares from secondary market‖. Do you agree?

Answer: The term investment here refers to real investment, not the financial investment. Real investment is concerned with the increase in stock of capital assets such as machines, tools, equipment, inventories and also fixed assets. Therefore investment demand does not include financial investments.

Question:  If in an economy seasonal-unemployment exists with voluntary unemployment, is it a situation of full employment?

Answer: Yes, it is a situation of full employment. Full employment is a situation in which there is no involuntary unemployment. If seasonal unemployment exists, they can be absorbed in alternative employment opportunities.

Question:  If disposable income increases what happens to household consumption expenditure?

Answer: Household consumption expenditure has a tendency to increase with the increase in disposable income, but at lesser rates than the rate of increase of income.

Question:  Rising inflation is a matter of corners for the Govt. in India. Suggest four measures to control inflation?

Answer: (i) Increase in the bank rate.

(II) Increase in reserve ratio

(III) Increase in taxation

(IV) Increase in margin requirement.

Question:  Assume that in India general price level is falling. Suggest four measures to raise the price level?

Answer: (a) Decrease in tax rates

(b)Increase in public expenditure

(c) Reduction in bank rate

(d)Decrease is reserve ratio

Question:  ―MPC falls with successive increase in the level of income‖. It is true always?

This may be true if there is equitable distribution of income. But, if there is unequal distribution of income the MPC will be high for a poor person as he needs to spend more to fulfill his requirements. 

Important Questions for Class 12 Economics Determination of Income and Employment

Question. Explain various instruments of monetary policy to control excess demand/ inflationary gap.
Answer: Monetary policy refers to the policy used by central bank to control and regulate money supply and credit in the economy. It includes following instruments: –

a) Quantitative instruments
(i) Bank rate: It is the rate at which central bank lends to commercial banks or discounts first class bills and securities of commercial banks for long-term needs.
In the situation of excess demand, central bank increase bank rate. It will further increase interest rate by commercial bank, so credit will become costlier and it will discourage the people to borrow from commercial banks. As a result, excess demand can be controlled.
(ii) Open market operations: It refers to buying and selling of government securities by central bank in open market. In the situation of excess demand, central bank sells government securities to commercial banks. So, it will decrease availability of funds available for credit with the banks, and it will result contraction of credit and thereby reduce AD of goods and services.
(iii) Capital Reserve Ratio(CRR): It is the percentage of total deposits which commercial bank has to keep with central bank in the form of reserves.
In the situation of excess demand, central bank increases CRR. It means bank must keep more percentage of deposits with central bank as reserve. So, it will decrease the capacity of commercial banks for credit. Thus, contraction of credit will help in controlling excess demand.
(iv) Statutory Liquidity Ratio(SLR): It is the percentage of total deposits which a commercial bank must keep with itself in the form liquid assets.
In the situation of excess demand, central bank increases SLR. It means more percentage of bank deposits has to keep by the bank itself. Thus, availability of funds for credit will decrease. So, contraction of credit will control excess demand.

b) Qualitative instruments
(i) Marginal requirement: It is the difference between value of securities offered against loan and amount of loan sanctioned.
In the situation of excess demand, central bank increases marginal requirement. It means less amount of loan will be sanctioned against the security offered to bank. So, it will result contraction of credit and helps to control excess demand.
(ii) Moral suasion: It refers to written or oral instruction given by central bank to commercial banks either for expansion or contraction of credit. In the situation of excess demand, central bank may compel commercial banks to reduce availability of credit.

Question. What do you mean by full employment equilibrium?
Answer: Full Employment Equilibrium refers to that situation when AD=AS at full employment. At this level, all economic resources are fully utilized with zero involuntary unemployment.

Question. What do you mean by deficient demand in macroeconomics?
Answer: Deficient Demand- In an economy when AD is less than AS at full employment, then it is called deficient demand.
Thus, it is the situation when current aggregate expenditure is less than full employment output level.
Deflationary gap- In the situation of deficient demand, the gap between current AD and AS at full employment level is called deflationary gap.
Thus, it is the amount by which AD is less than required AD to attain full employment level. 

Question. Explain the derivation of saving curve from given linear consumption curve.
Answer: Saving refers to that part of income which is not spent on consumption. Thus, it is the excess of income over the consumption. Consumption and savings are complimentary to each other. Derivation of saving curve from linear consumption curve is explained as below: –

* Income curve is shown by 45˚ line and linear consumption curve is given by upward sloping as directly related to income level and starts from positive value of y-axis due to autonomous consumption.
* At income level zero, saving is negative value of autonomous consumption as shown by ‘a’ in the lower panel of the diagram.
* When income and consumption curve intersect each other i.e. point ‘M’ i.e. both are equal, then savings will be equal to zero shown by point ‘M₁’.

* At income level OY₂, saving will be equal to ΔS. By joining three points, i.e. S, M₁ and T, we get saving curve.

Question. What is excess demand in macroeconomics?
Answer: In an economy when AD is more than AS at full employment level, it is called excess demand. Thus, it is a situation where current aggregate expenditure exceeds full employment output level.
Inflationary gap: In the situation of excess demand, the gap between current AD and AS at full employment level is called inflationary gap. In other words, it is the excess of current AD over the full employment output level.