# Important Questions Class 12 Macro Economics Chapter 4

## Important Questions for CBSE Class 12 Macroeconomics Chapter 4 – Determination of Income and Employment

Chapter 4 “Determination of Income and Employment” of Class 12 Macroeconomics deals with several topics like demand, supply, investment, the consumption function, types of investments, employment, types of unemployment, the inflationary and deflationary gap, etc.

Extramarks Important Questions Class 12 Macroeconomics Chapter 4 – Determination of Income and Employment, are outlined by subject matter experts to help students do well in their exam preparations.

CBSE Class 12 Macro Economics Chapter-4 Important Questions

Study Important Questions for Class 12 Economics Chapter 4 – Determination of Income and Employment

Students can view some of the important questions for Class 12 Macroeconomics Chapter 4 here:

Very Short Answer Questions (1 Mark)

Q1. The law of Psychological consumption states.

1. a) consumption does not change in the same direction as income.
2. b) consumption changes in the same direction as investment .
3. c) consumption changes in the opposite direction as income .
4. d) consumption changes in the same direction as income but APC remains less than the unity.

Ans: (d) Consumption changes in the same direction as income but APC remains less than the unity

Q2. The investment demand function is

1. a) The relationship between investment demand and the National income.
2. b) The relationship between investment demand and disposable income.
3. c) The relationship between investment demand and the rate of interest.
4. d) The relationship between investment demand and consumption expenditure.

Ans: (c) The relationship between investment demand and the rate of interest

Q3. State the important factor influencing the propensity to consume in an economy.

Ans: It is always the level of income (Y) that impacts an economy’s propensity to consume (C).

Q4. What is equilibrium income?

Ans: Equilibrium income is the amount of income at which aggregate demand equals aggregate supply. That is, when AD = AS, there is equilibrium income.

Q5. A multiplier tells us what will be the

1. a) change in investment results in a change in income.
2. b) final change in the income, as a result of the change in consumption.
3. c) final change in consumption, as a result of the change in investment.
4. d) final change in the income, as a result of the change in investment.

Ans: (d) Final change in the income, as a result of the change in investment

Q6. In a two-sector economy, Aggregate Demand equals

1. a) Consumption + Private consumption expenditure
2. b) Consumption + Exports
3. c) Consumption + Investments
4. d) Consumption + Government Expenditure

Ans: (c) Consumption + Investments

Q7. MPS = 1 + MPC. It is

1. a) depending on their values
2. b) True
3. c) False
4. d) None of the above

Ans: (c) False

Q8. APC + APS should always be equal to 1

1. a) False
2. b) Depends on their values
3. c) True
4. d) None of the above

Ans: (c) True

Q9. Consumption changes in the same direction as income. It is

1. a) True
2. b) False
3. c) Can’t say
4. d) Insufficient information

Ans: (a) True

Q10. Write down the equation of the saving function.

Ans: The equation of the saving function is given below.

S = −a + (1 − b) y

Here,

1-b = MPS

Y= Income

-a = Savings, when Y is 0

Q11.  What are the components of aggregate demand?

Ans: The components of aggregate demand are as follows.

• Investment Expenditure
• Household Consumption Expenditure
• Net Export
• Government Consumption Expenditure

Q12. What are the types of saving functions?

Ans: The two main types of saving functions are as follows.

• Marginal Propensity to Save: It is the ratio of change in savings to the change in income.
• Average Propensity to Save: It is the ratio of savings to the corresponding income level.

Short Answer Questions (3 or 4 Marks)

Q1. Explain the components of S = -a + (1-b)Y

Ans: The equation of the saving function is: S = -a + (1-b)Y

In this equation, -a represents the intercept term and the amount saved when there is no income. Savings are zero because income consumption ‘a’ is positive. Negative saving is also known as dissaving, and it means that there is dissaving of the amount represented by -a at the 0 level.

The coefficient 1-b is used to calculate the slope of the saving function. The slope of the saving function shows how much money is saved for every unit increase in income. This is known as the Marginal Savings Propensity. Because b,’ or the Marginal Propensity to Consume, is less than one, 1-b, or the MPS, is positive. And in this case, Y stands for income.

Q2. Can the value of APS be negative? If yes, then when?

Ans: Yes, when spending/consumption exceeds income, the average propensity to save may be negative. APS can never be greater than one because a person cannot save more than his or her income.

For example: Assume that the income is Rs. 1000 and the consumption expenditure is Rs. 1200.

Y= C-S

S= C-Y

S= 1000-1200

S= -200

APS = SY

APS = −2001000

APS = -0.2

Q3. Differentiate between ex-ante and ex-post-investment.

Ans: The differences between ex-ante and ex-post investment are as follows:

 Ex-ante Investment Ex-post Investment Ex-ante is the planned investment in which the planner plans to invest at a distinct level of income and employment in the economy. When actual sales differ from planned sales and enterprises, ex-post-investment enters the picture. It is a fictitious (intended) situation in which a company assumes the level of investment on its own. It is true or unique in that it represents an existing time investment. It is planned based on future expectations. This is the actual outcome of the variables.

Long Answer Questions (6 Marks)

Q1. Explain the role of the following in correcting deficient demand in an economy.

1. Open market operations

Ans: The central bank’s sale and purchase of government and other sanctioned securities by commercial banks and other financial institutions are known as open market operations. When the cash balance of the economy needs to be increased, especially when demand is low, the central bank purchases a variety of securities. This increases the cash holdings of commercial banks, allowing them to make more loans and advances. As a result, total demand rises.

2. Bank rate

Ans: The bank rate is the rate of interest at which the central bank lends to commercial banks. The central bank lowers the bank rate to control the situation of insufficient demand. Commercial banks lower their market interest rates as a result of the central bank’s reduction in the bank rate. Consumers and investors will benefit from lower commercial bank borrowing costs. This increases credit demand, resulting in more liquidity in people’s hands. As a result, in this case, consumption and investment spending rise, as does aggregate demand (AD).

Q1-When AD>AS corresponding to full employment level, it leads to ________________.

Opt

a-Rise in nominal national income

b-Rise in real national income

c-Rise in level of output

d-Rise in employment

ANS-Rise in nominal national income

Q2-There are two statements marked as Assertion (A) and Reason (R). Read the statements and chose the correct option:

Assertion (A): Saving curve starts from negative y-axis.

Reason (R): The level of savings at zero level of income is negative due to autonomous consumption.

Opt-

a-Both A and R are true and R is the correct explanation of A.

b-Both A and R are true but R is not the correct explanation of A.

c-A is correct but R is wrong.

d-A is wrong but R is correct.

ANS-Both A and R are true and R is the correct explanation of A.

Q3-Explain the determination of equilibrium level of income with the help of a diagram.

opt-

Equilibrium level of income is determined at the point at which aggregate demand is equal to aggregate supply.
Aggregate demand is the total expenditure on goods and services in an economy. It consists of consumption and investment expenditure.
Aggregate supply refers to total production of goods and services in an economy.
The equilibrium level of income is determined at a point where AD = AS.

Determination of equilibrium level of income:
Hypothetical Schedule of AD-AS Approach

ANS-Equilibrium level of income is determined at the point at which aggregate demand is equal to aggregate supply.
Aggregate demand is the total expenditure on goods and services in an economy. It consists of consumption and investment expenditure.
Aggregate supply refers to total production of goods and services in an economy.
The equilibrium level of income is determined at a point where AD = AS.

Determination of equilibrium level of income:
Hypothetical Schedule of AD-AS Approach

 National Income (Y) Consumption (C) Investment (I) Aggregate Demand (AD) AD = AS 0 200 100 300 300 250 100 350 400 300 100 400 Equilibrium 500 350 100 450

The above table and the diagram shows that the equilibrium level of income is ? 400 crores because at this level of income (E)

AD (400) = AS (400).

## FAQs (Frequently Asked Questions)

### 1. What are the components of aggregate demand?

The components of Aggregate Demand are as follows.

• Investment Expenditure
• Household Consumption Expenditure
• Net Export
• Government Consumption Expenditure

### 2. What are the types of Saving Functions?

The two main types of Saving Functions are as follows.

Marginal Propensity to Save: It is the ratio of change in savings to the change in income.

Average Propensity to Save: It is the ratio of savings to the corresponding income level.