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**Page No 59:**

**Question 1: What is marginal propensity to consume? How is it related to marginal propensity to save?Answer:** Marginal propensity to consume refers to the ratio of change in the consumer’s expenditure due to the change in disposable income (income after deducting taxes). In other words, MPC measures how consumption will vary with the change in income.

So,

MPC

Where,

ΔC = Change in consumption

ΔY = Change in income

For example, if income increases from Rs 200 crores to Rs 250 crores and consumption increases from Rs 20 crores to Rs 40 crores, it implies that 0.4 is the MPC or 40% increase in the income is being consumed.

This can further be explained with the help of a table and a diagram.

If income and consumption are:

Also, MPC can be explained with the given diagram.

In the diagram, x-axis represents national income and y-axis represents consumption level.

So, MPC

The relationship between MPC and MPS can be explained as −

Y = C + S (Assuming that the income earned is either consumed or saved)

Or, ΔY = ΔC + ΔS

Dividing both sides by ΔY

Or, 1 = MPC + MPS

Or, MPC = 1 − MPS

Or, MPS = 1 − MPC

So, the sum of MPC and MPS is always equal to unity.

Answer:

Question 3: What do you understand by ‘parametric shift of a line’? How does a line shift when its

(i) slope decreases, and

(ii) its intercept increases?

Answer:

b = ma + ε

Where m = slope of straight line, m > 0

ε = intercept on vertical axis, ε> 0

Also, when a increases by 1 unit, the value of b increases by m units.

The parameters εand m are parameters of a graph.

As the value of m increases, the straight line rotates upward around the same vertical intercept. This movement is an example of parametric shift of the graph.

(i) A straight line rotates downward around the same vertical intercept as its slope decreases.

(ii) A straight line shifts parallelly upward when its intercept increases.

Answer:

The x-axis represents income/output level and y-axis represents the level of aggregate demand. E is the equilibrium point where the two curves AS and AD meet. EG is the effective demand and output level is determined by AD (assuming the elasticity of supply to be perfectly elastic).

Autonomous expenditure multiplier is derived as

Y = AD (at equilibrium)

Y = A + cY [Where AD = A + cY]

Y − cY = A

Y (1 − c) = A

Where

A = Autonomous expenditure

c = MPC

Y = level of income

autonomous expenditure multiplier

So, the autonomous expenditure multiplier is dependent on the income and MPC.

Answer:

MPS = 0.2

So, MPC = 1 − MPS

= 1 − 0.2

= 0.8

Y = 4000 Crores

We know that AD = A + cY (1)

Putting the values in equation (1)

AD = 50 + 0.8 × 4000

= 50 + 3200

= Rs 3250 Crores

But, Rs 3250 < Rs 4000

Implies that AD < Y

Hence, the economy is not in equilibrium.

Answer:

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