Determination of Income and Employment Class 12 Economics Exam Questions

Please refer to Determination of Income and Employment Class 12 Economics Exam Questions provided below. These questions and answers for Class 12 Economics have been designed based on the past trend of questions and important topics in your class 12 Economics books. You should go through all Class 12 Economics Important Questions provided by our teachers which will help you to get more marks in upcoming exams.

Class 12 Economics Exam Questions Determination of Income and Employment

Class 12 Economics students should read and understand the important questions and answers provided below for Determination of Income and Employment which will help them to understand all important and difficult topics.

Question- Let the consumption function be given as:
C = 100 + 0.7 Y
Derive saving function.
Ans. Thus, saving function can be derived as S = Y – C
        S =Y- (100 + 0.7 Y)
           = Y – 100 – 0. 7 Y
        S = -100 + 0.3 Y

Question- What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?
Ans . Effective Demand Principle For simplicity we assume a constant price of final goods and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle.
Q5. Measure the level of ex ante aggregate demand when autonomous investment and consumption expenditure (A) is ₹50 crores, and MPS is 0.2 and level of income (Y) is 4000 crores. State whether the economy is in equilibrium or not (cite reasons).
Ans. MPG = 1 – MPS = 1 – 0.2 = 0.8, Y = ₹ 4,000 crores
         AD = G + I = c0 + CY + I where G = MPG
              = Co + I + CY
         AD = A + CY_where, A = Co + I
              = 50 + 0.8 (4000) = ₹ 3,250
  AS or Y = ₹ 4,000
Here, aggregate demand 1s less than aggregate supply. Hence, the economy 1s not m equilibrium.

Question. Explain ‘Paradox of Thrift’.
Ans. Paradox ofThrift If all the people of the economy increase the proportion of income they save. (i. e. if the MPS of the economy increases), the national income in the economy will not increase. This result is known as the Paradox of Thrift. It states that as people become more thrifty, they end up saving more. As a result, saving curve shifts upwards and national income falls.

Question- Explain deflationary gap. What does it measure?
Ans. The y-axis measures consumption demand, investment demand, and their sum is the aggregate demand. The x-axis measures the level of output and income. OYis the full employment level of output and income. AD and AD1 are two parallel aggregate demand curves, differing only by the amount of investment expenditure.

For the economy to be at a full employment equilibrium, the aggregate demand should be for a level of output equal to the full employment level of output OY. In other words, aggregate demand should be equal to YF. The economy will then be in a full employment equilibrium, corresponding to the point F on the aggregate demand curve AD and the economy will produce full employment level of output OY. Suppose, that the aggregate demand is for a level of output GY. GY is less than FY. Then aggregate demand is for a level of output which is less than the full employment level. This level of aggregate demand corresponds to point G on the aggregate demand curve AD1

• This results in a situation of deficient demand. The resulting deflationary gap created due to deficient demand is equal to FG. The deflationary gap is the difference between the level of aggregate demand required to establish the full employment equilibrium and the actual level of aggregate demand. The deflationary gap is a measure of the amount of deficiency of aggregate demand.

Question- What is the difference between consumption expenditure and autonomous consumption expenditure?
Ans. Consumption expenditure is the total expenditure on purchasing good and services for private consumption purposes by all households in an economy.
A. utonom. ous Consumption Expenditure is the amount of consumption expenditure when mcome 1s zero

Question. Define break-even point with respect to consumption and saving.
Ans. Break-even point occurs when all income is consumed. In other words, savings are zero.

Question- What is the difference between ex ante investment and ex post investment?
Ans. Ex ante investment. It is the planned, desired or intended investment during a particular period.
Ex post investment. It is a realised investment. It is equal to ex ante investment + unplanned investment. Ex post investment can be equal to ex ante investment, if unplanned investment = 0.

Question. 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?
Ans. Movement Along a Curve vs. Shift of a Curve
Let G = c + bY be the consumption function
Also Let c = 2 and b = 0.8. Thus, G = 2 + 0.8Y
Consider two situations:
( 1) When b changes
(2) When c changes.
(a) When b changes-b is the slope of the consumption curve, when b decreases from 0.8 to 0.5, then consumption curve (which is a straight line) swings downwards. This is called a Parametric shift of a graph. It is shown in adjoining fig. Thus, when slope decreases the curve shifts downward and when slope increases the curve shifts upward. It is called parametric shift of a graph.
(b) When c changes-It is the autonomous part of the consumption function. It graphically gives the intercept of the consumption curve. If increases from 2 to 3, there will be parallel upward shift in the consumption curves. It is shown in adjoining fig.
Thus, when slope changes, there is parametric shift m the curve. When intercept changes, there are parallel shifts in the curve

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