Worksheet Solutions: Determination of Income and Employment - 2 | Economics Class 12 - Commerce PDF Download

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Q1: Consumption represents the demand for goods and services used for ________.
Ans: day-to-day consumption in an economy
Consumption represents the demand for goods and services used for day-to-day consumption in an economy, driving economic activity through individual spending.

Q2: Autonomous Consumption is independent of ________.
Ans: income
Autonomous Consumption is independent of income, signifying the basic level of spending individuals engage in regardless of their earnings.

Q3: Marginal Propensity to Consume (MPC) ranges between ________.
Ans: 0 and 1
Marginal Propensity to Consume (MPC) ranges between 0 and 1, indicating the proportion of additional income that individuals spend on consumption, influencing economic growth.

Q4: Investment refers to the increase in the stock of ________.
Ans: physical capital
Investment refers to the increase in the stock of physical capital, such as machinery and buildings, enhancing the economy's productive capacity for the future.

Q5: Income is the money earned by individuals from ________ or production activities.
Ans: work, investments
Income is the money earned by individuals from work or investments, forming the basis for their spending and contributing to economic circulation.

Q6: Aggregate demand is the sum of ________ and investment expenditure on goods.
Ans: consumption expenditure
Aggregate demand is the sum of consumption expenditure and investment expenditure on goods, reflecting the total demand for goods and services in an economy.

Q7: Market equilibrium occurs when ________ is equal to aggregate supply.
Ans: aggregate demand
Market equilibrium occurs when aggregate demand is equal to aggregate supply, representing a balanced state where all goods produced are sold in the market.

Q8: The investment multiplier is the ratio of the change in ________ to the initial change in planned investment expenditure.
Ans: national income
The investment multiplier is the ratio of the change in national income to the initial change in planned investment expenditure, illustrating the impact of investment on overall economic output.

Q9: Government expenditure adds to aggregate demand, while taxes imposed by the government reduce ________.
Ans: households' disposable income
Government expenditure adds to aggregate demand, stimulating economic activity, while taxes reduce households' disposable income, affecting their spending patterns and overall demand.

Q10: If a change in investment of Rs 2000 results in a change in national income of Rs 8000, then the investment multiplier is ________.
Ans: 4
If a change in investment of Rs 2000 results in a change in national income of Rs 8000, then the investment multiplier is 4, indicating that every unit increase in investment leads to a fourfold increase in national income.

Assertion and Reason Based

Q1: Assertion: Consumption changes at a constant rate in response to changes in income.
Reason: This is because individuals always spend a fixed portion of their income.
(a) Both Assertion and Reason are True, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are True, but Reason is NOT the correct explanation of Assertion.
(c) Assertion is True, but Reason is False.
(d) Assertion is False, but Reason is True.
Ans: (b)
The Assertion is true because consumption does change at a constant rate in response to changes in income, but it's due to the concept of Marginal Propensity to Consume (MPC), not because individuals always spend a fixed portion of their income. The Reason is incorrect because consumption changes due to MPC, which is the fraction of additional income that a consumer spends on consumption. It is not a fixed portion but a variable percentage based on income changes.

Q2: Assertion: Investment goods are considered intermediate goods in the production process.
Reason: Investment goods, such as machines, are used directly by consumers.
(a) Both Assertion and Reason are True, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are True, but Reason is NOT the correct explanation of Assertion.
(c) Assertion is True, but Reason is False.
(d) Assertion is False, but Reason is True.
Ans: (d)
The Assertion is false. Investment goods are not intermediate goods; they are final goods used by businesses to enhance future productive capacity. They are not directly consumed by end-users. The Reason is true. Investment goods, like machines, are indeed used directly by businesses for production, not by consumers for personal consumption.

Q3: Assertion: Aggregate demand is only influenced by consumption expenditure and investment expenditure.
Reason: Government economic activities do not affect aggregate demand.
(a) Both Assertion and Reason are True, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are True, but Reason is NOT the correct explanation of Assertion.
(c) Assertion is True, but Reason is False.
(d) Assertion is False, but Reason is True.
Ans: (c)
The Assertion is true to some extent, but it's an oversimplification. Aggregate demand is influenced by consumption expenditure, investment expenditure, government expenditure, and net exports. Government spending is a significant component of aggregate demand. The Reason is false because government economic activities, such as spending on infrastructure or public projects, do affect aggregate demand. Government expenditure is a vital component of the overall demand for goods and services in an economy.

Q4: Assertion: Market equilibrium is a situation where supply exceeds demand.
Reason: In market equilibrium, producers cannot sell all the goods they produce.
(a) Both Assertion and Reason are True, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are True, but Reason is NOT the correct explanation of Assertion.
(c) Assertion is True, but Reason is False.
(d) Assertion is False, but Reason is True.
Ans: (d)
The Assertion is false. Market equilibrium occurs when demand equals supply, meaning that neither supply nor demand exceeds the other. It represents a balanced state in the market. The Reason is true. In market equilibrium, all goods produced are sold. If supply exceeds demand, there would be a surplus, indicating that producers cannot sell all the goods they produce.

Q5: Assertion: The investment multiplier measures the change in government spending's impact on national income.
Reason: Investment multiplier is calculated based on changes in government expenditure.
(a) Both Assertion and Reason are True, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are True, but Reason is NOT the correct explanation of Assertion.
(c) Assertion is True, but Reason is False.
(d) Assertion is False, but Reason is True.
Ans: (d)
The Assertion is false. The investment multiplier measures the change in national income based on initial changes in planned investment expenditure, not specifically government spending. It applies to any form of autonomous expenditure, not just government expenditure. The Reason is true. The investment multiplier is calculated based on changes in initial spending, which could be from any source, including government expenditure. It's not limited to government spending but represents a broader economic principle.

Very Short Answer Type Questions

Q1: What is induced consumption?
Ans: Induced consumption is the portion of consumption that changes with disposable income.

Q2: Define Marginal Propensity to Consume (MPC).
Ans: Marginal Propensity to Consume (MPC) is the change in consumption per unit change in income.

Q3: What is the role of household income in consumption?
Ans: An increase in household income leads to increased consumption.

Q4: Explain Autonomous Consumption.
Ans: Autonomous Consumption refers to the level of consumption that is independent of income.

Q5: What influences producers' investment decisions?
Ans: Producers' investment decisions are influenced by prevailing market interest rates.

Q6: What does market equilibrium signify?
Ans: Market equilibrium signifies a situation where aggregate demand equals aggregate supply.

Q7: How is national income calculated?
Ans: National income is calculated by summing up the income earned by individuals, firms, and governments.

Q8: What are investment goods?
Ans: Investment goods refer to final goods that enhance future productive capacity.

Q9: What does the investment multiplier measure?
Ans: The investment multiplier measures the change in national income per unit change in investment.

Q10: What affects households' disposable income?
Ans: Government taxes reduce households' disposable income.

Short Answer Type Questions

Q1: Explain the concept of Aggregate Demand and its components.
Ans: Aggregate demand is the total demand for goods and services in an economy, comprising consumption and investment. Consumption includes autonomous and induced consumption, influenced by income. Investment enhances future productivity.

Q2: Describe the role of government in determining income.
Ans: Government influences income through expenditure (G) and taxes (T). Government spending adds to aggregate demand, while taxes reduce disposable income and induced consumption, affecting overall income.

Q3: Elaborate on the concept of the Investment Multiplier.
Ans: Investment multiplier measures the change in national income due to an initial change in planned investment expenditure. It signifies the total increase in the equilibrium value of final goods output relative to the initial increment in autonomous expenditure.

Q4: Discuss the factors influencing investment decisions by producers.
Ans: Producers' investment decisions depend on prevailing market interest rates. Lower rates encourage investment, enhancing future productivity and economic growth.

Q5: Explain how Market Equilibrium is achieved in an economy.
Ans: Market equilibrium occurs when aggregate demand equals aggregate supply. At this point, all goods and services produced are sold, ensuring a balanced market situation.

Q6: Describe the relationship between Consumption and Income.
Ans: Consumption and income are directly related. An increase in income leads to increased consumption expenditure, while decreased income results in reduced consumption. The relationship is described using the consumption function.

Q7: Discuss the impact of government taxation on households' disposable income.
Ans: Government taxation reduces households' disposable income by deducting taxes from their earnings. This reduction in income affects induced consumption expenditure, leading to changes in overall consumption and economic activities.

Q8: Explain the concept of Autonomous and Induced Consumption.
Ans: Autonomous consumption is the base level of consumption independent of income. Induced consumption changes with disposable income variations. The total consumer demand is the sum of autonomous and induced consumption.

Long Answer Type Questions

Q1: Explain the role of Consumption in an economy and the factors influencing it.
Ans: Consumption plays a vital role in the economy as it represents the spending by individuals and households on goods and services. It is a key component of aggregate demand, which determines the level of economic activity and growth. Several factors influence consumption:

• Disposable Income: The level of disposable income available to individuals greatly impacts their consumption. Higher disposable income leads to increased consumption as people have more money to spend.
• Interest Rates: Interest rates affect consumption through their impact on borrowing costs and savings. Lower interest rates encourage borrowing, which can stimulate consumption. Conversely, higher interest rates may discourage borrowing and incentivize saving, leading to lower consumption.
• Consumer Confidence: Consumer confidence reflects the overall optimism or pessimism about the state of the economy. When consumers feel positive about the economy and their future income prospects, they are more likely to increase their consumption.
• Wealth and Assets: The level of wealth and assets owned by individuals also influences their consumption behavior. Higher wealth levels can lead to increased consumption, as people feel more financially secure.
• Expectations of Future Income: People's expectations about their future income can impact their consumption decisions. If individuals anticipate a rise in their income, they may be more inclined to increase their consumption.
• Demographic Factors: Factors such as population size, age distribution, and household composition can influence consumption patterns. For example, an aging population may have different consumption needs compared to a younger population.

Overall, consumption is a crucial driver of economic growth and can be influenced by various factors that shape individuals' spending behavior.

Q2: Discuss the impact of Government Expenditure and Taxes on Aggregate Demand and income.
Ans: Government expenditure and taxes have a significant impact on aggregate demand and income in an economy. Here's how:

• Government Expenditure: When the government increases its expenditure on goods, services, and infrastructure projects, it directly contributes to aggregate demand. Increased government spending stimulates economic activity, as it creates demand for goods and services, generates employment, and boosts income levels. This leads to a multiplier effect, where increased income from government expenditure further stimulates consumption and investment, ultimately driving economic growth.
• Taxes: Taxes play a crucial role in financing government expenditure and shaping aggregate demand. The impact of taxes on aggregate demand depends on their level and how they are imposed.
  • Direct Taxes: Direct taxes, such as income tax, reduce individuals' disposable income, which can lower consumption and aggregate demand. However, the extent of this impact can vary based on the progressivity of the tax system and the distribution of tax burdens among different income groups.
  • Indirect Taxes: Indirect taxes, like sales tax or value-added tax (VAT), are levied on goods and services at the point of purchase. These taxes increase the prices of goods, reducing consumers' purchasing power and potentially decreasing consumption. The impact on aggregate demand depends on the elasticity of demand for different goods and services.
  • Tax Cuts: Reductions in taxes, especially for lower-income groups or businesses, can boost disposable income and stimulate consumption and investment. Tax cuts can increase aggregate demand and provide an economic stimulus.

Overall, government expenditure and taxes are powerful tools that can influence aggregate demand and income in an economy. The appropriate balance between these fiscal policies is crucial for maintaining economic stability and promoting growth.

Q3: Elaborate on the concept of the Investment Multiplier.
Ans: The investment multiplier is a concept that explains how an initial change in investment can lead to a larger overall change in a country's income or output. It demonstrates the relationship between investment and the resulting increase in aggregate demand.
The investment multiplier works through the process of induced spending. When there is an increase in investment, it creates additional income for businesses, which then leads to increased consumer spending. This increased consumer spending, in turn, generates further income for businesses, creating a multiplier effect.
Mathematically, the investment multiplier can be expressed as follows:

• Investment Multiplier = 1 / (1 - Marginal Propensity to Consume)
• The Marginal Propensity to Consume (MPC) represents the portion of each additional dollar of income that is spent on consumption. The formula shows that as the MPC increases, the investment multiplier becomes larger, meaning a given change in investment will have a greater impact on overall income.
• For example, if the MPC is 0.8 (80%), the investment multiplier would be 5 (1 / (1 - 0.8) = 5). This implies that a $1 increase in investment would lead to a $5 increase in income.

The investment multiplier highlights the importance of investment in stimulating economic growth. However, it is important to note that the multiplier effect can work in reverse as well. A decrease in investment can lead to a contraction in output and income, amplifying the initial decline.

Q4: Explain the concept of Autonomous and Induced Consumption.
Ans: Autonomous and induced consumption are two components that make up total consumption in an economy.

• Autonomous Consumption: Autonomous consumption refers to the level of consumption that occurs even in the absence of any income. It represents the minimum level of consumption necessary for individuals to maintain their basic needs and survival. Autonomous consumption is typically financed through savings or borrowing. Examples of autonomous consumption include essential food and housing expenses.
• Induced Consumption: Induced consumption, on the other hand, is the additional consumption that occurs as a result of changes in income. It is directly influenced by changes in disposable income. When income increases, individuals tend to spend a portion of the additional income on consumption, leading to induced consumption. Conversely, a decrease in income may result in reduced consumption.

The relationship between income and induced consumption is captured by the Marginal Propensity to Consume (MPC), which represents the proportion of each additional dollar of income that is spent on consumption. The MPC determines the slope of the consumption function, which shows the relationship between income and consumption.
Mathematically, induced consumption can be calculated as:

• Induced Consumption = MPC × Change in Income
• For example, if the MPC is 0.8 (80%) and there is a $1,000 increase in income, the induced consumption would be $800 (0.8 × $1,000).

Autonomous and induced consumption together determine the total consumption in an economy. Autonomous consumption sets the baseline level of consumption, while induced consumption responds to changes in income, leading to fluctuations in overall consumption levels.