CBSE Test Paper-03

Chapter 03 Determination of Income and Employment

1. If income is Rs 1000 and consumption expenditure is Rs 1200, APS will be (1)

a. 0.4
b. -0.2
c. 0.3
d. -0.5
2. APC+APS= (1)
a. 1.0
b. 3
c. 2
d. 4

3. Multiplier tells us what will be the (1)

a. Final change in the income, as a result of change in consumption

b. Final change in the consumption, as a result of change in investment
c. Final change in the income, as a result of change in investment
d. Change in investment results in the change in income

4. In C = a+ b (Y), ‘b’ denotes (1)

a. MPC
b. MPS
c. 1 + MPC
d. 1 - MPC

5. Name any two components of Aggregate Demand. (1)

6. Define Cash Reserve Ratio (CRR). (1)

7. What is the relationship between Marginal Propensity to Save and Marginal

Propensity to Consume? (1)

8. What is Marginal Efficiency of Investment? (1)

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 9. Calculate Marginal Propensity to Consume from the following: (3)
Equilibrium income = Rs. 350
Consumption expenditure at zero income = Rs. 20
Investment = Rs. 50.

10. Give the meaning of Average Propensity to Save. What is its relation with Average
Propensity to Consume? (3)

11. Explain two fiscal measures by which excess demand in an economy can be reduced.
(4)

12. An economy is in equilibrium. Find ‘autonomous consumption’ from the following (4)
National Income = Rs 1,000
Marginal Propensity to Consume =0.8
Investment Expenditure = Rs 100

13. An economy is in equilibrium. Calculate Marginal Propensity to save from the

following: (4)
National Income = Rs 1,000
Autonomous consumption = Rs 100
Investment expenditure = Rs 200

14. Complete the following table. (6)

Income Consumption Marginal Propensity to Average Propensity to

(Y) Expenditure (C) Save |(MPS) Save (APS)

0 80 - -

100 140 0.4 -

200 - - 0

- 240 - 0.20

- 260 0.8 0.35

15. Distinguish between excess demand and deficient demand. (6)

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 CBSE Test Paper-03
Chapter 03 Determination of Income and Employment

Answers

1. b. -0.2
Explanation: APC=C/Y=1200/1000=1.2
Now, APS=1-APC
APS=1-1.2=-0.2

2. a. 1.0
Explanation: We know, APS=S/Y
APC=C/Y. Also, Y=C+S , because income is either consumed or saved.
Now, C/Y+S/Y=C+S/Y=Y/Y=1.

3. c. Final change in the income, as a result of change in investment

Explanation: Multiplier implies change in income as a result of change in
investment,

Where K is multiplier,

4. a. MPC
Explanation: 'bY 'denotes induced consumption where 'b' denotes marginal
propensity to consume.

5. The components of Aggregate Demand are as follows :

i. Net exports.
ii. Household consumption expenditure.

6. Cash Reserve Ratio (CRR) is a certain minimum amount of deposit that the
commercial banks have to hold as reserves with the central bank. CRR is set
according to the guidelines of the central bank of a country.

7.

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 Add (i) and (ii)
MPS+MPC=
But

8. It refers to the expected rate of return from an additional investment. In other words
it is the estimsted net returns from an additional investment in a project.

9. Given National Income Y = Rs. 350, Investment, I = Rs. 50; = Rs. 20

Now, Y = C + bY + I
350 = 20+ b(350) + 50
350 = 70+ b (350)
350 -70 = b (350)
280 = b (350),
MPC = b = 0.8. Therefore Marginal Propensity to Consume is equal to 0.8

10. Average Propensity to Consume (APC) is the ratio of the total consumption to total
income and Average Propensity to Save (APS) is the ratio of total saving to total
income.
As we know that, Income
(Y) = Consumption (C) + Saving (S)
Dividing throughout by Y, we get,

1=APC + APS
or APC= 1 - APS
and APS= 1- APC

i. Average propensity to consume (APC). APC is the ratio of total consumption

expenditure to total income. It is the percentage (or ratio) of income which is spent
on consumption. Thus, it gives the average consumption-income relationship at
different levels of income. It is worked out by dividing total consumption
expenditure (C) with total income (Y). Symbolically:

ii. Symbolically, Average Propensity to Save (APS) =

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 For instance, if aggregate income of an economy is र 5,000 crores and aggregate
consumption is र 4,500 crores, then:

It shows 90% of income is spent on consumption.

11. Excess demand refers to a situation in which aggregate demand exceeds aggregate
supply corresponding to full employment. This gives rise to an inflationary gap which
causes a rise in the price level leading to inflation. The two fiscal measures to reduce
excess demand are as follows :

i. Reduction in Government Expenditure: It is the principal component of fiscal

policy. When there is excess demand government expenditure on public works,
education, defence, maintenance on law and order should be reduced. A reduction
by government will reduce a pressure on aggregate demand and it will shift
downward. The fall in govt expenditure should be equal to the inflationary gap.
ii. Increase in taxes: The Government should levy new taxes and enhance the rate
of the existing ones. This will reduce disposable income of the people and will
result in reduction in aggregate demand.

12. Given: An economy is in equilibrium,

Saving = Investment
Y=C+1
or ....... (i)

On substituting the given variables in equation (i), we get

Autonomous Consumption’ = Rs. 100 in an equilibrium economy.

i. National Income (Y) = Rs 1,000

ii. Investment Expenditure (I) = Rs 100
iii. Marginal Propensity to Consume (MPC/b) =0.8

13. Calculation of Marginal Propensity to save

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 It is given that
Since the economy is in equilibrium level, Saving = Investment
Y = C + I, (as S = I)
or ..... (i)

On substituting the given variable in equation (i), we get

1000 = 100 + b(1000) + 200
or 1000 = 300 + 1000b
1000 - 300 = 1000b
or
Marginal Propensity to Consume (MPC) = 0.7
Now,Marginal Propensity to Save (MPS) = 1 - MPC
= 1 - 0.7
MPS = 0.3

i. Investment expenditure (I) = 200

ii. Autonomous Consumption =100
iii. National Income (Y) = Rs 1,000
14.

Change Change Marginal Average

Income Consumption Saving
in in Propensity Propensity
(Y) Expenditure (S) (Y-
Saving ( Income to Save to Save
(C+S) (C) (Y-S) C)
S) ( Y) (MPS) (APS)

0 80 -80 - - - -

100 140 -40 40 100 0.4 -0.4

200 200 0 40 100 0.4 0

300 240 60 60 100 0.6 0.20

400 260 140 80 100 0.8 0.35

Formulae used:
i. C=Y-S, S = Y-C
ii.

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15. Deficient demand and excess demand can be distinguished from each other in the
following manner:
i. Deficient demand is a situation, which occurs due to excess of aggregate supply of
output over the aggregate demand for output at the level of full employment. On
the other hand, excess demand is a situation, which occurs due to the excess of
aggregate demand for output over the supply of output at the level of full
employment.
ii. Deficient demand generates a deflationary gap. But excess demand generates an
inflationary gap.
iii. Deficient demand leads to a fall in output, employment, and price level. But excess
demand leads only to an increase in the price level. Between the two – excess
demand and deficient demand, the latter is worse.

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