Reason Based & Extra Questions - Concepts of AD & AS and related aggregates | Crash Course of Macro Economics -Class 12 - Commerce PDF Download

Reason Based Question’s

(Q1) Consumption function would be linear in case MPC is found to be constant 

Ans: True , This is because a linear consumption function is a straight line consumption function having constant slope . And, the slope is indicated by MPC. Constant MPC constant slope and therefore, a straight line linear consumption function.

(Q2) In  Keynesian model , short period equilibrium is discussed with reference to constant (fixed) price level.

Ans: True , because of the assumption that AS is perfectly elastic due to existence of excess capacity of the economy.

(Q3) Break-even point is struck when saving is equal to zero.

Ans: True , because at break-even point Consumption = Income and so saving = 0

(Q4) Consumption (C) is positively related to income (Y) but C is not zero when Y is zero.

Ans: False , whereas investment is autonomous, increase in income is induced through increase in expenditure.

(Q5)  Aggregate Demand is measured not as the sum total of goods but as the sum total of planned expenditure on the goods during as accounting year.

Ans: True , Because it is not possible to add up physical quantities of the goods and services planned to be purchased by the people.  Accordingly, Aggregate Demand is measured in terms of planned expenditure on the goods and services during an accounting year

(Q6) Aggregate Demand curve (indicating aggregate expenditure at different levels of income) slopes downward from left to right.

Ans: False ,   Aggregate Demand curve (indicating aggregate expenditure at different levels of income), slopes upward from left to right.  This is because expenditure is positively related to income.

(Q7)  Total consumption in the economy can never be more than national income.

Ans: False ,  Consumption is more than national income before the break-even point.

(Q8) Both MPS and APS can be equal to one

Ans: False ,  MPS can be equal to one when entire additional income is saved.  However, APS can never be equal to one as savings can never be equal to income.

(Q9) The point at which consumption curve intersects the 45 degree line, APS is zero

Ans: True , It happens because at this point, consumption is equal to income and saving is zero

(Q10) A firm will invest, if its marginal efficiency of investment is 12% and the rate of interest is 16%
Ans: False ,  the firm will not invest as marginal efficiency of investment is iless than the rate of interest.

(Q11) Both APC and APS fall with increase in national income

Ans: False,With increase in national income, proportion of income consumed (APC) falls, but proportion of income saved (APS) rises.

(Q12) C can exceed Y, but S cannot 

Ans: True ,as there is always some minimum level of C even when the level of Y is zero.

(Q13)  AD does not include exports.

Ans: False , AD includes exports. Because exports refer to demand for the domestically produced goods in rest of the world.

(Q14) APC and MPC are never equal.

Ans: False , When APC is constant, APC will be equal to MPC.

(Q15) Negative value of APS  implies negative value of MPS

Ans: False , The value of APS is negative when consumption is greater than income but MPS is never negative. Because it is the ratio between S and Y and S can never be negative, as a component of Y .

(Q16) The sum total of APC  and APS is always equal to one, even when APC > 1

Ans: True , as  consumption and saving are the only two components of income.

(Q17) A tax on the households reduces their MPC 

Ans: False  , a tax on the households only reduces their disposable income.

(Q18) (a) In the Keynesian model , short period equilibrium is discussed with reference to constant price level  
Ans:  T                                    

(b)  In macroeconomics, aggregate demand refers to planned purchase of goods and services during a year.
Ans:  T

(c) AS is measured not as the sum total of goods but as the sum total of planned expenditure on the goods during an accounting year.
Ans:  T

(d) Minimum level of expenditure is dependent of the level of income in the economy.
Ans: F

(e) Exports in an open economy indicate demand for foreign goods.
Ans: F

(f) Aggregate demand depends upon price level.
Ans: F

(g) Aggregate supply depends upon cost of production.
Ans: F

EXTRA QUESTION’s

(Q1)  Do you think increase in MPS should be beneficial to the growth of GDP in INDIA ?

Ans: If it is banked and banks invests it . In india banking habits are poor and saving remains as idle cash and causes deficiency of AD and decreases GDP 

(Q2) What are “ desired stock ” with the producer  ? 

Ans: It is that level of stock where AS = AD & the producers are in the state of                 equilibrium

(Q3) If income of a consumer rises by Rs. 50,000, what will be its impact on his consumption expenditure ?  Comment on his response.

Ans: The consumer would like to increase his expenditure but by less than increase in income.  This is according to Keynesian Psychological Law of Consumption . There is 

tendency of the people not to spend on consumption the whole of incremental income.

(Q4)  Why is consumption expenditure of involuntarily unemployed not zero even at zero level of income ?

Ans: Even an unemployed worker with no (zero) income has to spend a minimum amount on consumption to survive.  This is called autonomous consumption.  Since he is unemployed having no source of income, he uses his past savings or sells his assets or borrows.

(Q5) Recently there has been a drastic fall in price of crude oil in the international market.  How far it will adversely affect India’s export of goods and services ?  What value is violated if the govt.  does not reduce the price of crude oil in the country ?

Ans: A drastic fall in price of crude oil will not only impact oil producing economies , but also Indian economy as far as India’s exports are concerned.  A fall in the price of crude oil would lead to a drastic fall in the level of income of oil producing countries to which India has been exporting goods and services.  As a result, demand for import of foreign goods by these countries will fall which will adversely affect India’s export of gods and services.

Values violated – (a) social responsibility (b) Fair dealings.

(Q6) What is a linear consumption function ?

Ans: Linear consumption function is a straight line consumption function in which MPC remains constant.

(Q7) ‘ Propensity to consume affects the level of Aggregate Demand in the economy ’.  Defend or refute.

Ans: The given statement can be defended on the ground that according to Keynesian economics, keeping other factors constant, any rise in propensity to consume (inclination to spend more on consumption from the amount kept for savings) leads to greater demand for goods and services that may cause a rise in the level of Aggregate Demand

 Similarly any fall in propensity to consume may cause a fall in the level of Aggregate Demand.

(Q8) The export fall 15% to 1718.07 cr. in first 6 months of FY 15.  How will this affect aggregate demand in the economy ?

Ans: Fall in export would be reflected as a fall in aggregate demand . Because ,                    exports are a component of aggregate demand.

(Q9) Why should rising MPS be a cause of worry when it is a sign of rising GDP in the economy?

Ans: Rising MPS implies falling MPC . It indicates that lesser and lesser proportion of the additional income goes to consumption expenditure.Implying a gradual shrinkage of AD (aggregate demand) in relation to Y (income). In such a situation, the economy might slip into a state of recession or economic slowdown.

(Q10) In India propensity to consume is fairly high. Why is it that the manufacturing sector in India shows a low rate of growth because of low demand ?

Ans: High propensity to consume in India is primarily because of low income of the people. When income is low, the bulk of it is used as expenditure on food and allied items. Having spent the bulk of their income on food (and related items), the people have limited capacity to buy manufactured goods. Thus, demand for manufactured goods remains low. Due to this  manufacturing sector shows a low rate of growth.  

(Q11) Exemption limit for the payment of income tax has been raised from Rs. 2 lakh to Rs. 2.5 lakh , for the financial year 2017-18.  Do you think it would help correct the deficiency of demand even when MPC remains constant ?

Ans: A rise in exemption limit from Rs. 2 lakh to Rs. 2.5 lakh would lead to a rise in disposable income of a taxpayer by Rs. 50,000. 

 Let us assume that MPC = 0.5, and it remains constant. It would mean that aggregate consumption in the economy would increase by 0.5 x Rs. 50,000 = Rs. 25,000 per taxpayer. Accordingly, deficiency of demand would be corrected. 

(Q12) How will implementation of the 7th pay commission impact AD in the economy ?

Ans: Implementation of the 7th pay commission is expected to increase disposable income of the people. It would mean increase in aggregate demand for goods and services. 

 It is hoped that increase in AD would break the deadlock of slow industrial growth in the economy. With the rise in industrial production , GDP growth rate is also expected to rise 

(Q13) ‘ Autonomous Investment is necessary for an economy ’ Do you agree with the statement ? Why ?

Ans: Autonomous investment means public investment which is made by the  government with the motive of promoting public welfare. It is invested by the public sector for the promotion of infra-structure and discovering innovations. Its main aim is to uplift the poor community and raise the standard of living of masses.

(Q14)  What is aggregate effective demand ? 

Ans: Demand which is actually spent or level of aggregate demand which is equal to AS

(Q15) Give meaning of AD ? How does budgetary Deficit effect it ? 

(Q16) What determines the level of household consumption demand in an economy ?

(Q17) Define Consumption function, saving Function and Investment demand function

(Q18) What are the important elements important in understanding investment  ? 

(Q19) Define ‘APC’. Among APC and MPC, whose value can be zero and why ? Explain.

(Q20) What are the limiting values of MPC ?

(Q21) Explain the components of savings function S = - C + (1 - b)Y.

(Q22) Why income and consumption lines intersect each other ? Explain by using appropriate table.

(Q23) The sum of marginal propensity to consume and marginal propensity to save is always equal to one. Explain how.

(Q24) Aggregate supply (AS) curve is always an upward sloping curve from origin at 450 . Why 

OR

At zero level of income, aggregate saving in an economy would be negative. Why ?

(Q25) Which of the following cannot have a negative value ? Give reasons for your answer.

(i) Average propensity to save
(ii) Marginal propensity to save