Test: Income Determination - 1 - UPSC MCQ

Aggregate Demand:
- Aggregate Demand (AD) represents the total amount of goods and services that households, businesses, and the government are willing to purchase at a given price level and within a specific time period.
- AD is composed of four main components: Consumption (C), Investment (I), Government Expenditure (G), and Net Exports (NX).
In a two sector economy:
- A two-sector economy consists of households and businesses, where there is no government involvement.
- In this case, the components of Aggregate Demand are Consumption (C) and Investment (I).
Answer:
- In a two-sector economy, Aggregate Demand equals Consumption (C) plus Investment (I).
- Therefore, the correct option is B: Consumption + Investment.
Explanation:
- Consumption (C) represents the total spending by households on goods and services.
- Investment (I) represents the total spending by businesses on capital goods, such as machinery and equipment, to increase future production capacity.
- In a two-sector economy, there is no government involvement, so Government Expenditure (G) is not included in the Aggregate Demand.
- Similarly, since there are no exports and imports in a closed two-sector economy, Net Exports (NX) is also not included in the Aggregate Demand.
- Hence, the correct option is B: Consumption + Investment.

To find the value of APC, we need to substitute the given values of C, D, G, and Y into the options and see which option gives us APC.
Given:
C = 1
D = 2
G = 3
Y = 4
Let's substitute these values into the options:
Option A: C/D = 1/2 = 0.5
Option B: C/G = 1/3 ≈ 0.33
Option C: C/Y = 1/4 = 0.25
Option D: C/S (S value is not given)
Since the value of S is not given, we cannot determine the value of APC using Option D.
Comparing the values of the remaining options:
Option A: APC = 0.5
Option B: APC = 0.33
Option C: APC = 0.25
Out of the remaining options, Option C gives us the lowest value for APC. Therefore, the answer is C.

Given: APS = ?
To find the value of APS, we need to analyze the options given.
Option A: S/D
- Here, S represents the numerator and D represents the denominator.
- However, there is no information given about what S and D represent.
- Therefore, we cannot determine the value of APS based on this option.
Option B: C/S
- Here, C represents the numerator and S represents the denominator.
- However, there is no information given about what C and S represent.
- Therefore, we cannot determine the value of APS based on this option.
Option C: S/Y
- Here, S represents the numerator and Y represents the denominator.
- Again, there is no information given about what S and Y represent.
- Therefore, we cannot determine the value of APS based on this option.
Option D: None of these
- This option implies that none of the given options is the correct answer.
- However, without any additional information, we cannot determine the value of APS.
Conclusion:
- Based on the given information, we cannot determine the value of APS.
- Therefore, the correct answer is none of the given options (Option D).

To find the value of APC APS, we can use the given information:
A:

4

B:

3

C:

2

D:

1.0

According to the options, the value of APC APS is given by option D, which is 1.0.
Explanation:
- APC APS stands for Average Points per Contest Attempt in the Advanced Placement Seminar.
- The given options provide the values for A, B, C, and D, which represent the different levels of achievement in the seminar.
- The value of APC APS is determined by calculating the average points scored per contest attempt.
- In this case, option D provides the value of 1.0 for APC APS.
- This means that, on average, a participant in the seminar scored 1.0 point per contest attempt.
Therefore, the correct answer is D. The value of APC APS is 1.0.

The sum of the Average Propensity to Consume (APC) and Average Propensity to save (APS) is always equal to unity, i.e., APC + APS = 1. It is so because the money income can either be spent on consumption or it can be saved.

Explanation:

The equation S = -a(1-b)Y represents the amount of savings (S) in an economy, where a is the marginal propensity to save and Y is the level of income. In this equation, -a represents the amount of dissavings done when there is a change in income.

Key Points:

• a: Marginal propensity to save


• Y: Level of income


• -a: Represents the amount of dissavings done when there is a change in income

Now, let's analyze the options:

Options:

• Option A: The amount of dissavings done when there is a high level of income. (Incorrect)


• Option B: The amount of dissavings done when there is a zero level of income. (Correct)


• Option C: The amount of savings done when there is a zero level of income. (Incorrect)


• Option D: The amount of savings done when there is a high level of income. (Incorrect)

From the given equation, it can be observed that when there is zero level of income (Y = 0), the amount of dissavings (-a) would also be zero. Therefore, option B is the correct answer.

The law of Psychological consumption states:
- Consumption changes in the same direction as income.
Explanation:
The law of Psychological consumption refers to the relationship between consumption and income. It suggests that as income increases or decreases, consumption also changes in the same direction. Here's a detailed explanation:
Consumption and Income:
- Consumption refers to the amount of goods and services that individuals or households purchase and use for their satisfaction.
- Income, on the other hand, represents the earnings or money received by individuals or households through various sources such as employment, investments, or business activities.
Understanding the Law:
- The law of Psychological consumption states that when income increases, individuals tend to spend more on consumption, thereby increasing their overall consumption levels.
- Similarly, when income decreases, individuals tend to spend less on consumption, resulting in a decrease in their overall consumption levels.
Reasons behind the Law:
- Increase in income leads to an increase in disposable income, which allows individuals to have more purchasing power.
- With higher disposable income, individuals feel more financially secure and confident, leading them to spend more on goods and services.
- On the other hand, a decrease in income reduces disposable income, making individuals more cautious about their spending and leading to a decrease in consumption.
Implications of the Law:
- The law of Psychological consumption has significant implications for businesses and the overall economy.
- Businesses often analyze consumers' income levels to predict their consumption behavior and adjust their marketing strategies accordingly.
- From an economic perspective, the law of Psychological consumption suggests that changes in income can have a multiplier effect on aggregate demand, influencing economic growth.
In conclusion, the law of Psychological consumption states that consumption changes in the same direction as income. As income increases, consumption also increases, and vice versa. This law helps explain consumer behavior and has implications for businesses and the economy as a whole.

We are given the information that MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save) are equal.
To find the value of MPC and MPS, we can use the formula:
MPC = Change in Consumption / Change in Income
MPS = Change in Savings / Change in Income
Since MPC and MPS are equal, we can equate the two formulas:
Change in Consumption / Change in Income = Change in Savings / Change in Income
This implies that the change in consumption is equal to the change in savings.
Now, let's analyze the given options:
A:

1.0

- This option suggests that the MPC and MPS are equal to 1.0. This means that for every increase in income, consumption and savings will increase by the same amount.
B:

4

- This option suggests that the MPC and MPS are equal to 4. This does not make sense as the values of MPC and MPS should be between 0 and 1.
C:

2

- This option suggests that the MPC and MPS are equal to 2. This does not make sense as the values of MPC and MPS should be between 0 and 1.
D:

3

- This option suggests that the MPC and MPS are equal to 3. This does not make sense as the values of MPC and MPS should be between 0 and 1.
Therefore, the correct answer is option A, which suggests that MPC and MPS are equal to 1.0.

MPS + MPC = 1

 

The coefficient (1-b) is also known as MPS (Marginal Propensity to Save).
Explanation:
- The coefficient (1-b) represents the Marginal Propensity to Save (MPS), which is the proportion of additional income that individuals save rather than spend.
- MPS is an important concept in economics as it helps determine the relationship between changes in income and changes in consumption and saving.
- The MPS can be calculated by subtracting the Marginal Propensity to Consume (MPC) from 1. The MPC represents the proportion of additional income that individuals spend rather than save.
- In this case, the coefficient (1-b) is equivalent to the MPS because it represents the proportion of income that is saved.
- This means that for every additional unit of income, (1-b) is saved and b is consumed.
- The MPS is an important component of Keynesian economics and is used to analyze the multiplier effect and the determinants of aggregate demand.
- By understanding the MPS, economists can make predictions about the impact of changes in income on saving and spending behavior in the economy.
In summary, the coefficient (1-b) is known as the Marginal Propensity to Save (MPS) and represents the proportion of additional income that individuals save rather than spend.