NCERT Questions for Class 12 Economics Chapter 4 – Determination of Income and Employment

Important Questions with Solutions of Class 12 Economics Chapter 4 – Determination of Income and Employment

1) State the relationship between Average Propensity to Consume (APC) & Average Propensity to Save (APS).

Ans – The relationship between Average Propensity to Consume (APC) & Average Propensity to Save (APS) will be their sum amounts to a single unity.

APC+APS=1 This relationship follows necessarily because a household’s total income is either spent on consumption or saved.

2) Define equilibrium income.

Ans – Equilibrium income refers to the income levels at which the aggregate demand equalling the aggregate supply. This is the level where your total spending on the goods and services in an economy is equal to the total output produced hence no tendency for the general level of income to change since the forces of demand and supply are evenly balanced.

3) Describe the values of the equation S=-a+(1−b) Y.

Ans – The equation S=-a+(1−b) Y is of the saving function where;

-a is the intercept term. This means the saving function is the level of savings when the income Y is zero. This can alternatively be negative & a can be (- minus), in which case 1−b is the coefficient that determines the slope of the saving function.

It reflects the Marginal Propension to Save, which is the additional savings from each extra income. Since b represents the Marginal Propensity to Consume and MPC is always less than one, 1−b will be positive.

Y is the level of income. As the income rises the slope makes the savings change by 1−b.

4) Is the Average Propensity to Consume larger than one? Explain why or why not.

Ans – Yes, the Average Propensity to Consume can be greater than one. This happens when consumption exceeds income.

For example, if the income of an individual is ₹1,000 while consumption is ₹1,200, the APC can be computed as follows:

APC = Consumption / Income = 1,200 / 1,000 = 1.20

5) Mention the differences between ex-ante & ex-post investment.

Ans –

Basis	Ex-ante Investment	Ex-post Investment
Meaning	Refers to the planned or intended level of investment for a specific period.	Refers to the actual level of investment that occurred during a specific period.
Type of Situation	Represents a forecasted or projected scenario, based on planned investment strategies.	Represents the real, actual investment made during the period.
Based On	Based on future expectations and projections.	Based on actual outcomes and realized investment.

6) Is the value of the Average Propensity to Save negative? If so, when?

Ans – Yes, the value of the APS can be negative when the spending is more than income. APS is savings over income, the ratio. Hence, when saving is negative which implies spending is more than income the APS will be negative.

Let’s take this further with an example.

Income: Y = ₹1000

Consumption: C = ₹1200

First, calculate savings (S):

S = Y−C

S = 1000−1200

S = −200

Then, calculate APS:

APS = S/Y

APS = −200 / 1000

APS = −0.2

In this scenario, APS is -0.2 indicating that consumption exceeds income leading to a negative APS.

7) In an economy were consumption C = 300+0.5Y & investment I = ₹600, calculate the below equation!

a. Equilibrium Level of Income

To find the equilibrium level of income, set aggregate demand (which is the sum of consumption and investment) equal to income Y:

Y = C + I

Substitute the given consumption and investment functions:

Y = (300+0.5Y) + 600

Combine and solve for

Y = 900+0.5Y

0.5Y = 900

Y = 900/0.5

Y = ₹1800

So, the equilibrium level of income is ₹1800.

b. Consumption Expenditure at the Equilibrium Level of Income

To find the consumption expenditure at the equilibrium level of income, substitute

Y = C + I

1800 = C + 600

1800 – 600 = C C = 1200

8) Define the function of deficient demand in an economy:

a. Open Market Operations

Open market operations involve the central bank’s buying and selling government securities and other assets legally permitted in the financial markets. It can help stimulate an economy through security purchases when the economy faces the problem of deficient demand. This boosts the reserves of commercial banks by making it easier for them to meet loan and advance demands. Thus, on the availability of credit, businesspeople and consumers will further increase their spending & further increase aggregate demand.

b. Bank Rate

This is the rate at which the central bank advances money to commercial banks. If anything is done to reduce deficient demand, lowering the bank rate by the central bank. In this way, market interest rates charged by commercial banks will decrease. Interest rates are inexpensive to consumers and businesses when they decrease. Greater borrowing by households and businesses means more consumption and investment spending, which will raise aggregate demand in the economy.

9) Picture a hypothetical propensity to consume curve & obtain the propensity to save curve.

Ans –

If we have to graphically represent the propensity to consume with the propensity to save, we can proceed as below:

1. Propensity to Consume Curve:

Draw the 45-Degree Line: First, draw a 45-degree line (OL) on a graph whose axes are Income & Consumption. Where the income and consumption are equal, points will be depicted.

Draw the Consumption Function (CC Curve): The CC curve will lie on top of the 45-degree line and reflect consumption at various income levels. It will be at the initial stages below the 45-degree line – showing dissaving or negative saving & cut across the 45-degree line at a breakeven point.

2. Determine the Breakeven Point:

Break-Even Point: Mark the point at which CC intersects the 45-degree line. The point represents that consumption equals income; there is no saving or dissaving at that level.

3. Derive the Propensity to Save Curve:

Graph of Savings: Savings at any given income level are the vertical difference between the consumption function, CC, and the 45-degree. To derive savings, subtract consumption from income at each level.

A New Graph for Savings: To answer our previous query, we need to draw a graph of the saving function – the S-curve, with income on the horizontal axis and savings on the vertical axis. Now draw the vertical distances obtained minus the values of the consumption curve in the last graph from the income level on this new graph.

Connect Points: Connect the plotted points. This is the S curve of saving. Notice that the saving curve will start from below the origin above OYA, i.e., the pdf file of the PowerPoint presentation. It has a negative saving and will cross the origin exactly at the breakeven point and rise as the income.

Example Illustration: From Part A – If the savings level is negative since it is assumed that at an income level of zero consumption is positive, we plot a level of savings that is a negative point.

At the Breakeven Point, where consumption equals income, savings are zero, so identify this point the savings. Calculate positive savings value & graph them at an income level where consumption is less than income. Connect those points on the graph to generate the savings curve.