Long Questions with Answers: Determination of Income And Employment - 2 | Economics for A Level PDF Download

6 MARKS QUESTIONS WITH ANSWERS

1. Draw a hypothetical propensity to consume curve from it draw the propensity curve to save curve

Ans. APC=C/Y        APS=S/Y

Propensity to save curve

Is drawn from propensity to consume curve

When Y=C      APC=1 

Till that point APS is negative at point‘s’

When y>c there is a positive saving

2. Explain the determination of income and employment with AD and AS. (Give schedule)

AD= C+I

AS=C+S        AS=Y (refers to countries national income)

The equilibrium level of income is determined at a point when AD=AS.

Equilibrium can be achieved at full employment and even at under employment situation.

It may not be always at full employment condition in an economy.

The above schedule shows equilibrium level of income is 300 where AD=AS 300=300.
 

3. Explain the equilibrium level of income, employment and output with saving and investment approach. What happens when savings exceeds investment?

Ans. Equilibrium is achieved when planned saving is equal to planned investment that is S=I.

This can be seen with the help of schedule and a diagram.

The equilibrium level of income is s 300 core and at this point S (100) = I (100) the equilibrium may necessarily not be at the full employment level.

When saving exceeds planned investment means people are consuming less and spending more as a result AD is less than AS.

This will lead to accumulation of more goods with producer .this will make the businessmen to reduce production consequently, output, income & employment will be reduced till the equilibrium level of income.

4. Draw a straight line consumption curve. From it derive a saving curve explaining the process. Show on the diagram.

a) The level of income at which average propensity to consume equal to one.

b) A level of income at which average propensity to save is negative.

Ans.

Ac is the consumption curve and OA is the consumption expenditure at zero level of income. Income minus consumption is saving.

When income is 0, the economy’s consumption level is OA. The corresponding level of saving is  -0A.

So -a is the starting point of saving curve. At OB level of income consumption is equal to income, so saving are zero. so B is another point on saving curve .

Join A and B and extend this line to S, AS is the saving curve.

1. The level of income at which APC is equal to one is OB.
2. A level of income at which APS is negative OY.

NUMERICALS.

1. If in an economy investment increases by Rs 1000 cores to Rs 1200 cores and as a result total income increases by 800 cores calculate capital MPS.

Ans. ΔI=1200-1000=200

ΔY=800

ΔK=ΔY/ΔI=800/200=4

K=1/MPS=4

MPS=1/4=0.25

MPS=0.25

2. IF in an economy the actual level of income is Rs 500crores whereas the full employment the level of income is RS 800 cores. The MPC=0.75 calculate the increase in investment required to achieve full employment income.

Ans. Actual income=Rs 500 cores

Full empl Income = Rs 800 cores

Δy = 800 - 500 = 300 cores

We know that Δy = K. ΔI

                        300 = 4 × 4 I

                        ΔI   = 75 crores

3. Calculation of APC and MPC given the level of Income and Consumption

4.  Calculation of APS and MPS given the level of   Income and consumption

Clue: APS = s/y          MPS = Δs/Δy              S=Y – C

5.Suppose the consumption equals c= 40 + 0.75 y, Investment equals I = Rs 60 and Y= C + I. Find

i) Equilibrium level of income 

ii) The level of consumption at equilibrium

iii) level of saving at equilibrium

Ans: i) Y= C + I                      AS = AD

Substituting the value of c and I we get

Y = 40 + 0.75y + 60               Y= C+ I                      I=60

(Y-0.75y)= 100

(1-0.75)Y=100

0.25Y =100

Y=100/0.25

Y=10000/25

Y=400 

Equilibrium level of income = Rs. 400 cr.

ii)AS =AD           

C= 40 + 0.75y

  Y = 400

 C= 40 + 0.75(400) = 340

C=340

iii) Y= C + S               So S= Y-C

S= 400 - 340 = 60

S= 60 crores

6. In a two sector economy, the saving and investment functions are:

            S= - 10 + 0.2Y                                     I = - 3 + 0.1Y

What will be the equilibrium level of income?

Ans: Equilibrium level of income S= I

            -10 + 0.2y = -3 + 0.1y

            0.2y – 0.1y = -3 + 10

            0.1y =7

           y = 70

7. Explain the components of  the equation C= 20 + 0.90 y and construct a schedule for consumption where income is Rs 200 , Rs 300 , Rs 350 and Rs 400.

Components of equation c=20 + 0.90y explained in ¾ mark question number 1

The schedule for consumption is as follows

C= 20 + 0.9 × 400 = 380

8. The consumption function is C= 20 + 0.9y. The value of Income is given as 100, 200, 300, 400 and 500. Find out the consumption schedule and draw the consumption curve.

The consumption schedule

The consumption curve is shown as

10. How is equilibrium output of final goods determined under short run fixed price?

Under short run fixed price, equilibrium output and equilibrium demand at fixed price and constant rate of interest can be found with the help of following formulas

Application level questions

Multiplier

1. In an economy an increase in investment leads to increase in national income     which is three times more than the increase in investment (calculate marginal propensity to consume)

2. In an economy the MPC is 0.95 investment is increased by Rs. 100 crores.    Calculate the total increase in income and consumption expenditure.

3. Explain with numerical example how an increase in investment in an economy affects the level of consumption.

4. An increase in investment leads to total rise in national income by Rs. 500     crores. If MPC is 0.9 what is the increase in investment? Calculate.

5. In an economy the MPC is 0.8 Investment is increased by Rs.500 crores.Calculate the total increase in income and consumption expenditure.

6. If in an economy MPC is 0.75 and its investment is increased by Rs.500 crores.Calculate the total increase in income and consumption expenditure

7. Complete the table

8. In an economy S= -50 +0.5Y is the saving function (where S=saving and Y=national income) and investment expenditure is 7000. Calculate 

(i) Equilibrium level of national income
 (ii) Consumption expenditure at Equilibrium level of N.I

9. From the following information about an economy calculate

(i) Its Equilibrium level of national income and

(ii) Saving at Equilibrium level of N.I

Consumption function = 200 + 0.9Y

Investment expenditure I = 3000.

10. Disposable income is Rs. 1000 crores and consumption expenditure is Rs.750 crores.   Find out average propensity to save and average represent to consume.

11. In an economy investment expenditure increased by Rs.700 crores. The marginal propensity to consume is 0.9 calculate total increase income and consumption expenditure

12. Complete the following table

13.  In an economy an increase in investment leads to increase in national income which is three times more than the increase in investment calculate marginal propensity to consume.

14. The disposable income is Rs.2500 crores and saving is Rs.500 crores. Find out average propensity to consume

15. In an economy MPC is 0.75 if investment expenditure is increased by Rs.500 crores. Calculate the total increase in income and consumption expenditure

16. As a result of increase investment by 125 crores national income increased by 500 crores. Calculate multiplier, MPC and MPS.

17. Given consumption function C=100+0.75 Y (where C=consumption expenditure and Y=national income) and investment expenditure Rs.2000  .calculate
 (i) Equilibrium level of national income
 (ii) Consumption expenditure at equilibrium level of income

18. In an economy S= -50+0.5Y is the saving function (where S=saving and Y=national income) and investment expenditure is 9000 calculate
 (i) Equilibrium level of national income
 (ii) Consumption expenditure at equilibrium level of national income

19. From the following information about an economy calculate (i) Equilibrium level of N.I  (ii) saving at Equilibrium level of income consumption function C=200+0.9Y (where C=consumption expenditure and Y=N.I. Investment expenditure I =5000

20. C=100+0.75 is a consumption function (where C= consumption expenditure and Y= N.I) and investment expenditures =1600 on the basis of this information calculate
 (i) Equilibrium level of national income
 (ii) Saving at Equilibrium level of NI.

21. Given below is the consumption function in an economy C=100+0.10Y. with the help of a numerical example show that in this economy as income increase APC will decrease.