Class 12 Determination of Income and Employment Mock Test (CBSE)

Topics in Determination of Income and Employment

• Aggregate demand and its components
• Consumption
• Investment
• Determination of income in two-sector model
• Macroeconomic equilibrium with price level fixed
• Effect of an autonomous change on equilibrium
• The multiplier mechanism
• Some more concepts: excess and deficient demand

Determination of Income and Employment practice questions with answers

1. Q1Multiple choice·1 mark
   Which of the following types of investment is generally considered to be independent of the level of income in an economy?

   1. (a)Private investment
   2. (b)Induced investment
   3. (c)Inventory investment
   4. (d)Autonomous investment
   Show answer and step marks

   1. Correct option: (d) Autonomous investment+1

   Answer: (d)
2. Q2Multiple choice·1 mark
   In the Keynesian linear consumption function $C = \bar{C} + bY$, what does the coefficient $b$ represent?

   1. (a)Marginal propensity to consume
   2. (b)Autonomous consumption
   3. (c)Average propensity to consume
   4. (d)Marginal propensity to save
   Show answer and step marks

   1. Correct option: (a) Marginal propensity to consume+1

   Answer: (a)
3. Q3Multiple choice·1 mark
   In a two-sector economy, the marginal propensity to consume is $0.8$. If an autonomous change raises planned investment by Rs $50$ crores, by how much does the equilibrium level of income change?

   1. (a)Rs $40$ crores
   2. (b)Rs $62.5$ crores
   3. (c)Rs $250$ crores
   4. (d)Rs $90$ crores
   Show answer and step marks

   1. Correct option: (c) Rs $250$ crores (multiplier $k = \frac{1}{1-0.8} = 5$, so $\Delta Y = 5 \times 50 = 250$)+1

   Answer: (c)
4. Q4Short answer·2 marks
   A survey of a closed economy with no government sector finds that households plan to spend Rs 800 crore on goods and services during the year. Firms, in the same survey, plan to spend Rs 250 crore on new machinery and factory buildings. Calculate the aggregate demand in this economy, showing the formula you use.
   Show answer and step marks

   1. Relation: aggregate demand is the sum of planned consumption expenditure and planned investment expenditure, $AD = C + I$+1
   2. Substitution and result: $AD = 800 + 250 = 1050$, so aggregate demand is Rs 1,050 crore+1

   Answer: Aggregate demand = Rs 1,050 crore
5. Q5Short answer·3 marks
   Assuming an increase in autonomous investment ($\Delta I$) by Rs 200 crores and a marginal propensity to consume ($MPC$) of $0.8$, explain the multiplier mechanism and calculate the total increase in the equilibrium level of income ($\Delta Y$).
   Show answer and step marks

   1. Mechanism: the extra investment of Rs 200 crores becomes income for factor owners; with $MPC = 0.8$ they spend Rs 160 crores, which becomes income for others, who spend Rs 128 crores, and so on, so income rises in successive rounds $200 + 160 + 128 + \dots$+1
   2. Multiplier: $k = \frac{1}{1 - MPC} = \frac{1}{1 - 0.8} = 5$, with $\Delta Y = k \times \Delta I$.+1
   3. Substitute: $\Delta Y = 5 \times 200 = \text{Rs } 1000 \text{ crores}$ (the sum of all the rounds).+1

   Answer: Each round of spending becomes income and $80\%$ of it is spent again ($200 + 160 + 128 + \dots$); $k = 5$, so $\Delta Y = \text{Rs } 1000$ crores.

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