Class 12 Economics Short Questions With Answers - Determination Of Income And Employment

Q.1. Define Aggregate Demand.
Or
What is ' Aggregate Demand ' in macroeconomics?
Ans. Aggregate Demand (AD) refers to the total expenditure on consumption and investment by different sectors of the economy.

Q.2. Define Aggregate Supply.
Or
What is ' Aggregate Supply ' in macroeconomics?
Ans. Aggregate Supply (AS) refers to the planned aggregate production by the producers during a period of one year. It is equal to the income generated.

Q.3. What are the two main constituents of AD?
Ans. The two main constituents of AD are:
(i) Consumption
(ii) Investment

Q.4. What are the two constituents of AS?
Ans. The two main constituents of AD are:
(i) Consumption
(ii) Saving

Q.5. What is consumption function or propensity to consume?
Ans. Consumption function or propensity to consume expresses the functional relationship between consumption expenditure and income.

Q.6. What is consumption?
Ans. Consumption refers to that part of income, which is spent by the households on the purchase of consumer goods and services.

Q.7. What does a consumption function show?
Ans. Consumption function shows the relationship between income and consumption.

Q.8. Give the meaning of autonomous consumption.
Ans. Autonomous consumption is the amount of consumption expenditure at zero level of income. It does not change with change in income.

Q.9. Give the meaning of ex-ante savings.
Ans. Ex-ante savings refer to the level of savings, which is planned to be made by the households during a period of one year.

Q.10. If planned savings are greater than planned investment what will be its effect on inventories?
Ans. If planned savings are greater than planned investment, inventories will increase.

Q.11. What are the two determinants of investment?
Ans. The two determinants of investment are:
(i) Marginal Efficiency of Capital
(ii) Rate of interest

Q.12. What is the main motive for investment in the private sector?
Ans. Expected profitability is the main motive for investment in the private sector.

Q.13. What is autonomous investment?
Ans. Autonomous investment is the investment, which is not affected by the changes in income, rate of interest or rate of profits.

Q.14. What is induced investment?
Ans. Induced investment is the investment, which is affected by the changes in income and production in the economy.

Q.15. Define investment.
Ans. Investment refers to purchase of new machines, new buildings and other capital goods that add to the existing stock of capital goods.

Q.16. Give the meaning of ex-ante investment.
Ans. Ex-ante investment refers to the investment, which is planned to be made by the firms during a period of one year.

Q.17. If S exceeds I in an economy, what will be its effect on level of income?
Ans. If S exceeds I in an economy then the level of income will decline.

Q.18. If I exceeds S in an economy, what will be its effect on level of income?
Ans. If I exceeds S in an economy then the level of income will increase.

Q.19. Define Say’s law of markets.
Ans. According to the Say's law of markets, ―Production is the source of demand."

Q.20. What is meant by full employment?
Ans. Full employment refers to a situation in which everyone who is willing to work at the existing wage rate gets work.

Q.21. What is Keynes’s conception of full employment?
Ans. According to Keynes, full employment exists when the Aggregate Supply function becomes perfectly inelastic in an economy.

Q.22. How is full employment equilibrium determined?
Ans. Full employment equilibrium is determined when Aggregate Demand function intersects the Aggregate Supply function on its perfectly inelastic part.

Q.23. What, according to Keynes, is the fundamental cause of involuntary unemployment?
Ans. According to Keynes, the fundamental cause of involuntary unemployment in an economy is the deficient demand.

Q.24. What is involuntary unemployment?
Ans. The involuntary unemployment refers to a situation in which the workers are willing to work at the prevailing wage rates but the jobs are not available to them.

Q.25. Describe the components of Aggregate Demand.
Ans. Aggregate Demand comprises of the following components:
(i) Private Consumption Expenditure (C): Household expenditure on goods and services during an accounting year is called consumption expenditure. It depends upon the level of income of the households.
(ii) Investment Expenditure (I): Investment expenditure is the expenditure on goods by private investors, which add to their capital stock. These goods include producer's durable, equipment, new construction and change in inventories.
(iii) Government Expenditure (G): Government expenditure, both consumption and investment, on public goods such as opening of schools, construction of roads, maintain law and order, provide justice, etc.
(iv) Net Exports (X - M): Net exports is the difference between total imports and total exports.

Q.26. In an economy Aggregate Demand is greater than Aggregate Supply. Explain the changes that will take place in this economy.
Ans. Excess demand refers to a situation in which Aggregate Demand in the economy is greater than the Aggregate Supply (AD > AS) at full employment level. The problem of excess demand can be corrected by contractionary fiscal or monetary policy. In the diagram, the initial Aggregate Demand curve is AD.

Aggregate Supply (AS) is a vertical line at the full employment level of output (Y ). With the initial government expenditure of G ; the Aggregate Demand is OY while Aggregate Supply is OY. There is a situation of excess demand of EA. As government expenditure is decreased to G₂, AD curve shifts down until equilibrium is attained (AD = AS) at full employment level of output. Thus, the problem of excess demand or inflationary gap can be corrected by decreasing public expenditure. As government expenditure is decreased to G , AD curve shifts down until equilibrium is attained (AD = AS) at full employment level of output. Thus, the problem of excess demand or inflationary gap can be corrected by decreasing public expenditure.

Q.27. What are induced and autonomous investments?
Ans. Induced Investment: Induced investment is the investment, which is affected by the changes in income and production in the economy. At higher level of income, the demand for goods is high and hence, the rate of profit increases. Investment automatically increases while rate of profit increases. Autonomous Investment Autonomous investment is the investment, which is not affected by the changes in income, rate of interest or rate of profits. In other words, autonomous investment is income inelastic. Autonomous investment is increased to provide education, health, etc. facilities to j increasing population.