CA Foundation Economics – Keynesian Theory Of Determination Of National Income Multiple Choice Questions

Determination Of National Income Introduction

Question 1. What is the central proposition of Keynesian theory regarding the determination of national income?

1. National income is determined by aggregate supply.
2. National income is determined by aggregate demand.
3. National income is determined by both aggregate supply and aggregate demand.
4. National income is determined by the government’s fiscal policy.

Answer: 2. National income is determined by aggregate demand.

Explanation:

According to Keynesian theory, the level of national income is determined primarily by the level of aggregate demand in the economy. Keynes argued that fluctuations in aggregate demand could lead to fluctuations in economic output and employment.

Question  2. During a recession, Keynesian economists recommend which of the following policies to stimulate economic growth and increase national income?

1. Decreasing government spending and raising taxes.
2. Decreasing the money supply to control inflation.
3. Increasing government spending and lowering taxes.
4. Reducing exports to protect domestic industries.

Answer: 3.  Increasing government spending and lowering taxes.

 

Question  3. In the Keynesian model, what is the role of private investment in determining national income?

1. Private investment has no impact on national income.
2. Private investment solely determines national income.
3. Private investment is a component of aggregate demand affecting national income.
4. Private investment only affects the inflation rate, not national income.

Answer: 3. Private investment is a component of aggregate demand affecting national income.

Explanation:

In the Keynesian model, private investment is one of the components of aggregate demand, which also includes consumption, government spending, and net exports. Changes in private investment can have significant effects on overall aggregate demand and, consequently, on the level of national income.

Question  4. According to the Keynesian theory, what can lead to a situation of “underemployment equilibrium” in an economy?

1. When aggregate demand exceeds aggregate supply.’
2. When aggregate supply exceeds aggregate demand.
3. When there is full employment in the economy.
4. When aggregate demand is insufficient to create full employment.

Answer: 4. When aggregate demand is insufficient to create full employment.

Explanation:

“Underemployment equilibrium” occurs in the Keynesian model when aggregate demand in the economy is not strong enough to generate full

Question 5. Which of the following represents the primary tool for the government to influence aggregate demand and stabilize the economy, according to Keynesian economics?

1. Monetary policy.
2. Fiscal policy.
3. Supply-side policies.
4. Exchange rate policy.

Answer: 2. Fiscal policy.

Explanation:

According to Keynesian economics, fiscal policy, which involves government spending and taxation, is the primary tool for influencing aggregate demand and stabilizing the economy. By adjusting government spending and taxes, the government can directly impact aggregate demand and support economic growth and stability.

Question  6. Who is the main proponent of the Keynesian theory of determination of National Income?

1. Adam Smith
2. John Maynard Keynes
3. Milton Friedman
4. Friedrich Hayek

Answer: 2. John Maynard Keynes

Explanation:

John Maynard Keynes, a British economist, is the main proponent of the Keynesian theory of determination of National Income. He developed his ideas during the Great  Depression in the 1930s and proposed policies to address unemployment and economic downturns.

Question 7. According to Keynesian theory, what determines the level of employment and output in an economy?

1. Consumer preferences and saving habits
2. Government spending and taxation policies
3. The interaction of aggregate demand and aggregate supply
4. The natural rate of unemployment.

Answer: 3. The interaction of aggregate demand and aggregate supply

Explanation:

According to Keynesian theory, the level of employment and output in an economy is determined by the interaction of aggregate demand (total spending in the economy) and aggregate supply (the total production of goods and. services). Changes in aggregate demand, such as government spending or consumer expenditure, can lead to fluctuations in output and employment.

Question 8. The central idea of the Keynesian theory is that

1. Government intervention is necessary to stabilize the economy
2. Market forces alone can ensure full employment and economic stability
3. Tax cuts are the most effective tool for economic growth
4. Private investment is the primary driver of economic prosperity.

Answer: 1. Government intervention is necessary to stabilize the economy

Explanation:

The central idea of the Keynesian theory is that government intervention is necessary to stabilize the economy, particularly during times of recession or high unemployment. Keynes advocated for active government policies, such as increasing public spending or reducing taxes, to boost aggregate demand and promote economic growth.

Question 9. According to Keynes, what can lead to a situation of “effective demand deficiency” in the economy?

1. Excessive government spending
2. High levels of consumer saving
3. Low interest rates set by the central bank
4. High levels of inflation

Answer: 2. High levels of consumer saving

Explanation:

According to Keynes, a situation of “effective demand deficiency” can arise in the economy when there is a high level of consumer saving relative to consumer spending. In such a scenario, overall demand for goods and services may fall short of the economy’s productive capacity, leading to unemployment and economic stagnation.

Question 10. Keynesian theory suggests that during an economic downturn, the government should implement

1. Austerity measures to reduce public debt
2. Supply-side policies to boost production
3. Contractionary monetary policies to control inflation
4. Expansionary fiscal policies to increase spending

Answer: 4. Expansionary fiscal policies to increase spending

Explanation:

During an economic downturn, the Keynesian theory suggests that the government should implement expansionary fiscal policies. These policies involve increasing government spending and reducing taxes to boost aggregate demand, stimulate economic activity, and counter the negative effects of recession or unemployment.

Question 11. Keynes argued that during periods of economic recession or depression, the government should

1. Increase taxes to reduce budget deficits
2. Reduce government spending to control inflation
3. Decrease interest rates to encourage private investment
4. Increase government spending to stimulate aggregate demand

Answer: 4. Increase government spending to stimulate aggregate demand

Explanation:

Keynes advocated for an increase in government spending during periods of economic recession or depression. This increase in government expenditure would lead to higher aggregate demand, resulting in increased economic activity and employment.

Question 12. The concept of “Multiplier Effect” in the Keynesian theory suggests that

1. Changes in government spending have a larger impact on National Income than changes in taxes.
2. A change in investment leads to a proportionate change in National Income.
3. Increases in exports result in higher economic growth and employment.
4. Changes in consumption have a direct and immediate impact on investment.

Answer: 1. Changes in government spending have a larger impact on National Income than changes in taxes.

Explanation:

The concept of “Multiplier Effect” in the Keynesian theory suggests that changes in government spending have a larger impact on National Income than changes in taxes. An increase in government spending leads to a chain reaction of increased consumption and investment,  which further raises National Income multiple times.

Question 13. According to Keynes, in situations of insufficient aggregate demand, the economy may experience

1. Demand-pull inflation
2. Cost-push inflation
3. Deflation and unemployment
4. Stagflation

Answer: 3. Deflation and unemployment

Explanation:

According to Keynes, in situations of insufficient aggregate demand, the economy may experience deflation (a decrease in the general price level) and unemployment. He argued that inadequate demand could lead to a downward spiral of reduced production, lower employment, and falling prices.

Question 14. The Keynesian theory of the determination of national income was proposed by

1. Adam.Smith
2. John Maynard Keynes
3. Milton Friedman
4. Friedrich Hayek

Answer:  1. John Maynard Keynes

Question 15. According to the Keynesian theory, the level of national income is primarily determined by: 

1. Aggregate demand in the economy
2. Aggregate supply in the economy
3. The government’s fiscal policy
4. The central bank’s monetary policy

Answer:  2. Aggregate supply in the economy

Question 16. The central idea of the Keynesian theory is that:

1. Supply creates its demand in the economy
2. Savings and investment are equal in the long run
3. The economy can experience prolonged periods of unemployment
4. Government intervention is unnecessary in a free-market economy

Answer:  3. The economy can experience prolonged periods of unemployment

Question 17. Keynes argued that during economic downturns, the government should

1. Reduce taxes and increase government spending
2. Increase taxes and reduce government spending
3. Allow market forces to correct the imbalances in the economy
4. Privatize state-owned enterprises to stimulate economic growth

Answer: 1. Reduce taxes and increase government spending

Question 18. The concept of “effective demand” in the Keynesian theory refers to

1. The total demand for goods and services in the economy
2. The demand for goods and services by the government sector
3. The demand for exports and imports in the economy
4. The demand for consumer goods only, excluding investment

Answer: 1. The total demand for goods and services in the economy

Question 19. Keynesian policies are designed to address

1. Short-run fluctuations in the business cycle
2. Long-run structural issues in the economy
3. Inflationary pressures in the economy
4. Excessive government debt and deficits

Answer: 1. Short-run fluctuations in the business cycle

Question 20. In the Keynesian theory, if aggregate demand is insufficient to achieve full employment, the result will be

1. Inflation
2. Deflation
3. Recession or unemployment
4. Economic growth and stability

Answer: 3. Recession or unemployment

Question 21. The Keynesian theory gained prominence during which historical period?

1. The Great Depression of the 1930s
2. The Industrial Revolution of the 18th century
3. The Renaissance era in Europe
4. The dot-com bubble of the late 1990s

Answer: 1. The Great Depression of the 1930s

Circular Flow In A Simple Two Sector Model

Question 1. In a simple two-sector model of the circular flow, the two sectors are

1. Government and households
2. Business firms and households
3. Government and business firms
4. Foreign sector and households

Answer: 2. Business firms and households

Explanation: 

In a simple two-sector model of the circular flow, the two sectors are business firms and households. Business firms produce, goods and services, while households provide factors of production (such as labor and capital) and consume the produced goods and services.

Question 2. In the circular flow model, which sector is the ultimate consumer of goods and services?

1. Business firms
2. Households
3. Government
4. Foreign sector

Answer: 2. Households

Explanation:

In the circular flow model, households are the ultimate consumers of goods and services. They purchase goods and services from business firms in the product market.

Question 3. In the circular flow model, which sector supplies factors of production to business firms?

1. Government
2. Households
3. Business firms
4. Foreign sector

Answer: 2. Households

Explanation:

In the circular flow model, households supply factors of production (such as labor and capital) to business firms in exchange for wages, rent, and profits in the factor market.

Question 4. Which of the following flows represents the payment made by business firms to households for providing factors of production?

1. Factor payments
2. Transfer payments
3. Investment spending
4. Consumption expenditure

Answer: 1. Factor payments

Explanation:

Factor payments represent the payment made by business firms to households for providing factors of production (such as wages for labor, rent for land, and profits for entrepreneurship). It occurs in the factor market.

Question 5. In the circular flow model, which sector provides funds to business firms for investment purposes?

1. Government
2. Households
3. Business firms
4. Foreign sector

Answer: 2. Households

Explanation:

In the circular flow model, households are the primary savers, and they provide funds to business firms for investment purposes. These funds come from savings and are used by businesses to finance capital investments and expand their productive capacity.

Question 6. In the circular flow model, households are the

1. Sellers of goods and services and buyers of factors of production
2. Buyers of goods and services and sellers of factors of production
3. Buyers of goods and services and buyers of factors of production
4. Sellers of goods and services and sellers of factors of production

Answer: 1. Sellers of goods and services and buyers of factors of production

Explanation:

In the circular flow model, households act as sellers of factors of production (such as labor) to businesses and as buyers of goods and services produced by businesses.

Question 7. Which of the following best represents the flow of goods and services in the circular flow model?

1. Money flows from households to businesses for goods and services.
2. Goods and services flow from households to businesses in exchange for money.
3. Money flows from businesses to households for factors of production
4. Factors of production flow from businesses to households in exchange for money.

Answer: 2. Goods and services flow from households to businesses in exchange for money.

Explanation:

In the circular flow model, goods and services flow from households to businesses in exchange for money (income)

Question 8. Savings in the circular flow model refer to

1. The money that businesses save from their profits
2. The money that households save from their income
3. The money that businesses invest in new projects
4. The money that households spend on goods and services

Answer: 2. The money that households save from their income

Explanation:

Savings in the circular flow model refer to the portion of household income that is not spent on consumption and is instead saved for future use or investment.

Question 9. In the circular flow model, the total value of goods and services produced in the economy is measured by

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net Domestic Product (NDP)
4. Net National Product (NNP)

Answer: 2. Gross Domestic Product (GDP)

Explanation:

In the circular flow model, the total value of goods and services produced in the economy is measured by Gross Domestic Product (GDP). GDP represents the sum of all final goods and services produced within a country’s borders during a specific period.

Question 10. In the circular flow model, households receive income in the form of

1. Profits
2. Taxes
3. Wages, rent, and interest
4. Government transfers

Answer: 3. Wages, rent, and interest

Explanation:

In the circular flow model, households receive income in the form of wages (for labor services), rent (for land), and interest (for capital). These are the payments households receive for providing their factors of production to firms.

Question 11. Which component of the circular flow represents the total spending by households on goods and services?

1. Savings
2. Investment
3. Government spending
4. Consumption expenditure

Answer: Consumption expenditure

Explanation:

Consumption expenditure represents the total spending by households on goods and services produced by firms. It is a crucial component of the circular flow as it indicates the demand side of the economy.

Question 12. In the two-sector circular flow model, savings by households are equal to

1. Consumption expenditure
2. Taxes paid to the government
3. Investment by firms
4. Government spending

Answer: 3. Investment by firms

Explanation:

In the two-sector circular flow model, savings by households are equal to investment by firms. In a simplified closed economy, savings equal investment since households’ savings are the source of funds for firms’ investment in new capital goods.

Question 13. The circular flow model assumes that all income earned by households is either spent on consumption or saved, and there is no

1. Government intervention
2. Investment by firms
3. Financial sector
4. Foreign trade

Answer: 4. Foreign trade

Explanation:

The circular flow model assumes a closed economy, meaning there is no foreign trade involved. It assumes that all income earned by households is either spent on consumption or saved, and there is no import or export of goods and services in this simplified model.

Question 14. In a simple two-sector model of the economy, the two main sectors are

1. Household and government ‘
2. Household and business
3. Business and government
4. Household and financial

Answer: 2. Household and government

Question 15. The circular flow model illustrates the flow of

1. Goods and services and money between households and firms
2. Goods and services and money between households and the government,
3. Goods and services and money between businesses and the government ‘
4. Goods and services and money between firms and financial ’ institutions

Answer: 1. Goods and services and money between households and the government,.

Question 16. In the circular flow model, households are the

1. Buyers of goods and services and sellers of factors of production
2. Buyers of goods and services and buyers of factors of production
3. Sellers of goods and services and sellers of factors of production
4. Sellers of goods and services and buyers of factors of production

Answer: 1. Buyers of goods and services and sellers of factors of production

Question 17. Which of the following represents the flow of money in the circular flow model?

1. Money flows from households to businesses as payment for goods and services
2. Money flows from businesses to households as payment for factors of production
3. Money flows from businesses to the government as taxes
4. Money flows from households to the government as taxes

Answer: 1. Money flows from households to businesses as payment for goods and services

Question 18. In the circular flow model, households receive income through

1. Profits earned from business activities
2. Government subsidies and transfers
3. Wages, salaries, and rent for providing factors of production
4. Interest earned from financial investments

Answer: 3. Wages, salaries, and rent for providing factors of production

Question 19. The circular flow model assumes that

1. There is no saving or investment in the economy
2. The government does not play a role in the economy
3. There are no leakages or injections in the flow of income
4. The economy is closed, with no foreign trade

Answer: 3. There are no leakages or injections in the flow of income

Question 20. Leakage in the circular flow model refers to

1. Money flowing out of the economy due to imports
2. Money flowing into the economy due to exports
3. Savings and taxes that reduce the flow of income
4. Government spending that increases the flow of income

Answer: 3. Savings and taxes that reduce the flow of income

Question 21. Injection in the circular flow model refers to

1. Money flowing into the economy due to exports
2. Money flowing out of the economy due to imports
3. Government spending and investments that increase the flow of income
4. Savings and taxes that reduce the flow of income

Answer: 3. Government spending and investments that increase the flow of income

Basic Concepts And Functions

Question 1. In economics, the study of how individuals and societies allocate limited resources to satisfy their unlimited wants is known as

1. Microeconomics
2. Macroeconomics
3. Economic planning
4. Economics

Answer: 4. Economics

Explanation:

Economics is the study of how individuals, households, firms, and societies allocate limited resources to satisfy their unlimited wants. It • encompasses both microeconomics (study of individual units) and macroeconomics (study of the overall economy).

Question 2. The total value of all final goods and services produced within a country’s borders during a specific period is known as

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP)
4. National Income

Answer: 1. Gross Domestic Product (GDP)

Explanation:

Gross Domestic Product  (GDP) is the total value of all final goods and services produced within a country’s borders during a specific period, usually a year. It is a key indicator of a country’s economic performance.

Question 3. Which of the following is NOT a factor of production in economics?

1. Land
2. Labor
3. Capital
4. Money

Answer: 4. Money

Explanation:

Money is not considered a factor of production in economics. The factors of production are land (natural resources), labor (human effort and skills), and capital (physical and human-made resources used in production).

Question 4. The price at which the quantity demanded of a good or service equals the quantity supplied is known as

1. Equilibrium price
2. Market price
3. Maximum price
4. Minimum price

Answer: 1. Equilibrium price

Explanation:

Equilibrium price is the price at which the quantity demanded of a good or service equals the quantity supplied in the market. At this price, there is no shortage or surplus of the product.

Question 5. The study of how individuals and firms make decisions and interact in markets is known as

1. Macroeconomics
2. Microeconomics
3. Economic planning
4. Econometrics

Answer: 2. Microeconomics

Explanation:

Microeconomics is the study of individual economic units such as households and firms and how they make decisions and interact in various markets. It focuses on the behavior of specific economic agents and the allocation of resources at a smaller level.

Question 6. Which of the following is a basic concept in economics that refers to the limited nature of resources?

1. Opportunity cost
2. Scarcity
3. Inflation
4. Gross Domestic Product (GDP)

Answer: 2. Scarcity

Explanation:

Scarcity is a fundamental concept in economics that refers to the limited availability of resources (such as land, labor, and capital) for unlimited wants and needs. It necessitates choices and trade-offs in allocating resources to various uses.

Question 7. Opportunity cost is defined as:

1. The cost of producing one additional unit of a good or service
2. The total cost of all inputs used in the production process
3. The highest-valued alternative is given up when a choice is made
4. The difference between total revenue and total cost

Answer:  3. The highest-valued alternative is given up when a choice is made

Explanation:

Opportunity cost is the value of the next best alternative forgone when a choice is made. It represents the trade-off between different options and helps in understanding the real cost of decisions.

Question 8. Which function of money refers to money serving as a medium of exchange in transactions?

1. Store of value
2. Unit of account
3. Medium of exchange
4. Standard of deferred payment

Answer: 3. Medium of exchange

Explanation:

The function of money as a medium of exchange refers to its use as a generally accepted medium to facilitate the exchange of goods and services in an economy. It eliminates the need for barter and enhances the efficiency of transactions.

Question 9. The Consumer Price Index (CPI) is a measure of

1. The overall level of prices in an economy
2. The total output produced in an economy
3. The unemployment rate in an economy
4. The government’s budget deficit

Answer: 1. The overall level of prices in an economy

Explanation:

The Consumer Price Index (CPI) is a measure of the overall level of prices of a basket of goods and services purchased by consumers. It is used to monitor inflation and changes in the cost of living over time.

Question 10. The total market value of all final goods and services produced within a country’s borders during a specific period is known as

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net Domestic Product (NDP)
4. Net National Product (NNP)

Answer: 1. Gross Domestic Product (GDP)

Explanation:

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country’s borders during a specific period, usually a  year. It is a key indicator of a country’s economic performance.

Question 11. The total value of all goods and services produced within a country’s borders during a specific period is known as

1. Gross National Product (GNP)
2. Gross Domestic Product (GDP)
3. Net Domestic Product (NDP)
4. Net National Product (NNP)

Answer: 2. Gross Domestic Product (GDP)

Explanation:

Gross Domestic Product (GDP) is the total value of all goods and services produced within a country’s borders during a specific period. It is a key indicator of a country’s economic performance. ,

Question 12. The measure of the responsiveness of quantity demanded of a good to a change in its price is known as

1. Elasticity of demand
2. Elasticity of supply
3. Marginal utility
4. Consumer surplus

Answer: 1. Elasticity of demand

Explanation:

The elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It helps economists understand how sensitive consumers are to price changes.

Question 13. Which type of unemployment occurs when there is a temporary mismatch between job seekers and available job vacancies?

1. Cyclical unemployment
2. Frictional unemployment
3. Structural unemployment
4. Seasonal unemployment

Answer: 2. Frictional unemployment

Explanation:

Frictional unemployment occurs when individuals are temporarily between jobs or are seeking new employment opportunities. It is a natural and unavoidable part of the job search process.

Question 14. The interest rate at which a central bank lends money to commercial banks is known as

1. Prime rate
2. Discount rate
3. Federal funds rate
4. LIBOR rate

Answer: 2. Discount rate

Explanation:

The interest rate at which a central bank lends money to commercial banks is known as the discount rate. It is one of the tools used by central banks to control monetary policy.

Question 15. Economics is the study of

1. How to maximize individual profits
2. How to achieve economic equality among individuals
3. How do societies allocate scarce resources to satisfy unlimited wants
4. How to control inflation and unemployment in the economy

Answer: 3. How do societies allocate scarce resources to satisfy unlimited wants

Question 16. The basic economic problem arises because

1. Governments are inefficient in resource allocation
2. Human wants are unlimited, but resources are limited
3. There is a surplus of goods and services in the market
4. Consumers’ preferences change frequently

Answer: 2. Human wants are unlimited, but resources are limited

Question 17. The concept of opportunity cost refers to

1. The monetary cost of an economic decision
2. The highest-valued alternative that must be given up when a choice is made
3. The additional cost incurred when producing one more unit of a good.
4. The total cost of production of a firm

Answer: 2. The highest-valued alternative that must be given up when a choice is made

Question 18. In economics, the term “demand” refers to

1. The quantity of a good or service that producers are willing to supply
2. The quantity of a good or service that consumers are willing and able to buy at a given price
3. The price at which producers are willing to sell a good or service
4. The price at which consumers are willing and able to buy a good or service

Answer: 2. The quantity of a good or service that consumers are willing and able to buy at a given price

Question 19. The law of supply states that

1. As the price of a good or service increases, the quantity demanded will increase
2. As the price of a good or service increases, the quantity supplied will decrease
3. As the price of a good or service decreases, the quantity demanded will decrease,
4. As the price of a good or service decreases, the quantity supplied will increase

Answer: 4. As the price of a good or service decreases, the quantity supplied will increase

Question 20. Which of the following is a function of money in an economy

1. To regulate imports and exports
2. To control inflation and deflation
3. To serve as a medium of exchange, a unit of account, and a store of value
4. To determine the distribution of income and wealth

Answer: 3. To serve as a medium of exchange, a unit of account, and a store of value

Question 21. In a market economy, the allocation of resources is primarily determined by

1. The government through central planning
2. Consumer preferences and market forces of supply and demand
3. Labor unions and collective bargaining
4. International trade agreements and treaties

Answer: 2. Consumer preferences and market forces of supply and demand

Question 22. The production possibilities frontier (PPF) represents:

1. The maximum quantity of goods and services that a country can produce using all available resources efficiently
2. The minimum level of production a country must achieve to meet its basic needs
3. The total output of a country’s economy in a given period
4. The income distribution among different income groups in an economy

Answer: 1.  The maximum quantity of goods and services that a country can produce using all available resources efficiently

Aggregate Demand Function

Question 1. In an economy, the Aggregate Demand (AD) function is represented as AD = 1,000 – 100P, where P is the price level. Calculate the Aggregate Demand when the price level is ₹ 5.

1. 1,500
2. 500
3. 1,000
4. 2,000

Answer: 2. 500

Solution:

To calculate Aggregate Demand, we need to substitute the given price level (P) into the AD function.

AD = 1,000 – 100P

AD = 1,000- 100₹ 5

AD = 1,000-500

AD = 500

So, the Aggregate Demand when the price level is ₹ 5 is 500

Question 2. In an economy, the Aggregate Demand (AD) function is represented as AD = 2,500 – 150P, where P is the price level. Calculate the Aggregate Demand when the price level is ₹ 10.

1. 1,500
2. 2,500
3. 2,000
4. 3,000

Answer: 3 .2,000

Solution: 

To calculate Aggregate Demand, we need to substitute the given price level (P) into the AD function.

AD = 2,500 – 150P

P = ₹ 10

AD = 2,500 – 150 × ₹ 10

AD = 2,500- 1,500,

AD = 2,000.

So, the Aggregate Demand when the price level is ₹10 is 2,000.

Question 3. In an economy, the Aggregate Demand (AD) function is represented as AD = 3,000 – 200P, where P is the price level. Calculate the Aggregate Demand when the price level is ₹ 15.

1. 2,500
2. 3,000
3. 1,500
4. 2,000

Answer: 3. 1,500

Solution:

To calculate Aggregate Demand, we need to substitute the given price level (P) into the AD function.

AD = 3,000 – 200P

P = ₹ 15

AD = 3,000 – 200 ×  ₹ 15

AD = 3,000 – 3,000 AD = 1,500

So, the Aggregate Demand when the price level is ₹ 15 is 1,500.

Question 4. In an economy, the aggregate demand (AD) function is represented as AD = 2,000 – 100P, where P is the price level. Calculate the equilibrium level of aggregate demand when the price level (P) is ₹15.

1. ₹ 1,000
2. ₹ 2,500
3. ₹  1,500
4. ₹  500

Answer: 3. ₹ 1,500

Solution:

To calculate the equilibrium level of aggregate demand, we need to substitute the given price level (P) into the AD function and solve for AD.

AD = 2,000 – 100P

P = ₹ 15

AD = 2,000 – 100  × ₹ 15.

AD = 2,000 – ₹ 1,500 AD = ₹ 500

So, the equilibrium level of aggregate demand when the price level (P)  is ₹15 is  1,500.

The Consumption Function

Question 1. In an economy, the consumption function is represented as C = 500 +  0. 8Y, where Y is the disposable income. Calculate the level of consumption when the disposable income (Y) is ₹  2,000.

1. ₹ 1,800
2. ₹ 1,900
3. ₹  2,500
4. ₹  2,200 ‘

Answer: 2. ₹ 1,900

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 500 + 0.8Y C = 500 + 0.8 × ₹ 2,000

C = 500 + ₹ 1,600

C = ₹ 2,100 ,

So, the level of consumption when the disposable income (Y) is ₹  2,000 is ₹ 1,900.

Question 2. In an economy, the consumption function is represented as C = 500 + 0. 8Y, where C is consumption and Y is disposable income. Calculate the level of consumption when disposable income (Y) is ₹ 1,000.

1. ₹ 1,200
2. ₹ 1,300
3. ₹ 1,400
4. ₹ 1,500

Answer: 2.  ₹ 1,300

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 500 + 0.8Y .

C = 500 + 0.8 × ₹ 1,000 C = 500 + ₹ 800

C  = ₹1,300

So, the level of consumption when disposable income (Y) is ₹ 1,000 is ₹ 1,300.

Question 3. In an economy, the consumption function is represented as C = 1,000 + 0.8Y, where Y is the disposable income. Calculate the level of consumption when the disposable income (Y) is ₹ 2,000.

1. ₹ 800
2. ₹ 1,200
3. ₹ 2,400
4. ₹ 2,800

Answer: ₹ 1,200

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 1,000+ 0.8Y C = 1,000+ 0.8 × ₹ 2,000

C = 1,000 + ₹ 1,600

C = ₹ 2,600

So, the level of consumption when the disposable income (Y) is₹ 2,000 is ₹ 1,200

Relationship Between Income And Consumption

Question 1. In an economy, the consumption function is represented as C = 800 + 0. 6Y, where Y is the disposable income. Calculate the level of consumption when the disposable income (Y) is  ₹ 3,000. 

1. ₹ 1,000
2. ₹ 1,800
3. ₹ 2,200
4. ₹ 1,400

Answer: 2. ₹ 1,800

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 800 + 0.6Y – C = 800 + 0.6 × ₹  3,000

C = 800 + ₹ 1,800

C = ₹ 2,600

So, the level of consumption when the disposable income (Y) is ₹ 3,000. is ₹ 1,800.

Question 2. In an economy, the consumption function is represented as C = 800 + 0. 6Y, where Y is the disposable income. Calculate the level of consumption when the disposable income (Y) is? 2,500.

1. ₹ 1,500
2. ₹ 2,000
3. ₹  2,200
4. ₹ 2,800

Answer: 3. ₹ 2,200

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 800 + 0.6Y C

= 800 + 0.6 × ₹ 2,500

C = 800 + ₹ 1,500

C = ₹ 2,300

So, the level of consumption when the disposable income (Y) is ₹ 2,500 is ₹ 2,200.

Question 3. In an economy, the consumption function is represented as C = 1,000 + 0.8Y, where C is the consumption and Y is the disposable income. Calculate the level of consumption when the disposable income (Y) is ₹ 5,000.

1. ₹ 1,800
2. ₹ 3,800
3. ₹ 4,000
4. ₹ 5,000

Answer: 2. ₹ 3,800

Solution:

To calculate the level of consumption, we need to substitute the given disposable income (Y) into the consumption function and solve for C.

C = 1,000 + 0.8Y C = 1,000 + 0.8 × ₹ 5,000

C= 1,000 + ₹ 4,000

C = ₹ 5,000

So, the level of consumption when the disposable income (Y) is ₹ 5,000 is ₹ 3,800.

The Relationship Between Income, Consumption And Saving

Question 1. In an economy, the consumption function is represented as C = 1,000 + 0.6Y, where C is the consumption and Y is the disposable income. Calculate the level of saving when the disposable income (Y) is ₹ 4,000.

1. ₹ 2,400
2. ₹ 1,600
3. ₹  2,000
4. ₹ 1,000

Answer: 1. ₹ 2,400

Solution:

To calculate the level of saving, we need to subtract the consumption from the disposable income (Y).

Saving (S) = Y – C

Saving (S) = ₹ 4,000 – (1,000 + 0.6 × ₹ 4,000)

Saving (S) = ₹ 4,000 – (1,000 + ₹ 2,400)

Saving (S) = ₹ 4,000 – ₹ 3,400 Saving (S) = ₹ 600

So, the level of saving when the disposable income (Y) is ₹ 4,000 is ₹ 2,400.

Question 2. In an economy, the consumption function is represented as C = 800 + 0. 6Y, where C is the consumption, Y is the disposable income, and S is the saving. Calculate the level of saving when the disposable income (Y) is ₹ 2,000.

1. ₹ 1,200
2. ₹ 800
3. ₹ 400
4. ₹ 1,600

Answer: 3. ₹ 400

Solution:

The saving (S) is the difference between disposable income (Y) and consumption (C). We can calculate it using the given consumption

Question 3. In an economy, the consumption function is represented as C = 1,000 + 0.6Y, where C is the consumption, and Y is the disposable income. Calculate the level of saving when the disposable income (Y) is ₹ 4,000.

1. ₹ 600
2. ₹ 1,600
3. ₹ 2,400
4. ₹ 2,600

Answer: 2. ₹ 1,600

Solution:

To calculate the level of saving, we need to subtract the consumption (C) from disposable income (Y).

S = Y-C

S = ₹ 4,000 – (1,000 + 0.6 × ₹ 4,000)

S = ₹ 4,000-(1,000+ ₹ 2,400)

S = ₹ 4,000 – ₹ 3,400 S = ₹  600 ‘

So, the level of saving when the disposable income (Y) is ₹ 4,000 is ₹ 1,600.

Aggregate Supply

Question 1. In an economy, the short-run aggregate supply (SRAS) curve is represented as SRAS = 1,500 + 0.5P, where P is the price level. Calculate the level of aggregate supply when the price level (P) is ₹ 10.

1. 1,550
2. 2,000
3. 2,500
4. 1,000

Answer: 1. 1,550

Solution:

To calculate the level of aggregate supply, we need to substitute the given price level (P) into the short-run aggregate supply (SRAS) curve and solve for SRAS.

SRAS = 1,500+ 0.5P .

SRAS = 1,500+ 0.5 × ₹

SRAS = 1,500 + ₹ 5

SRAS = 1,550

So, the level of aggregate supply when the price level (P) is ₹ 10 is 1,550.

Question 2. In an economy, the short-run aggregate supply (SRAS) curve is represented as SRAS = 2,000 + 100P, where P is the price level. 

1. 2,100
2. 3,000
3. 2,500
4. 2,200

Answer: 1. 2,100

Solution:

To calculate the level of aggregate supply, we need to substitute the given price level (P) into the SRAS curve and solve for SRAS.

SRAS = 2,000 + 100P

SRAS = 2,000+ 100 × ₹ 10

SRAS = 2,000+ ₹ 1,000

SRAS = ₹ 3,000

So, the level of aggregate supply when the price level (P) is ₹ 10 is 2,100.

Question 3. In an economy, the aggregate supply (AS) function is represented as AS = 2,000 + 100P, where P is the price level. Calculate the level of aggregate supply when the price level (P) is ₹ 10.

1. ₹ 2,000
2. ₹ 3,000
3. ₹ 2,100
4. ₹  2,500

Answer: 2. ₹  3,000

Solution:

To calculate the level of aggregate supply, we need to substitute the given price level (P) into the AS function and solve for AS.

AS = 2,000 + 100P

AS = 2,000 + 100 × ₹ 10

AS = 2,000 + 1,000

AS = ₹  3,000

So, the level of aggregate supply when the price level (P) is t 10 is ₹ 3,000.

The Two-Sector Model Of National Income Determination

Question 1. In the two-sector model of National Income determination, the two main sectors are

1. Government and households
2. Government and foreign trade
3. Households and firms (businesses)
4. Firms (businesses) and foreign trade

Answer: 3. Households and firms (businesses)

Explanation:

In the two-sector model, the economy consists of two main sectors – households and firms (businesses). Households are the consumers who own factors of production (labor, land, capital), and firms are the producers who use these factors to produce goods and services.

Question 2. In the two-sector model, the total output produced by firms is either consumed by households or

1. Saved by households
2. Invested by firms
3. Exported to foreign countries
4. Imported from foreign countries

Answer: 1. Saved by households

Explanation:

In the two-sector model, the total output produced by firms is either consumed by households or saved by households. Saving is the portion of income not spent on consumption.

Question 3. In the two-sector model, the total income earned by households is either spent on consumption or

1. Invested by firms
2. Taxed by the government
3. Exported to foreign countries
4. Imported from foreign countries

Answer: 1. Invested by firms

Explanation:

In the two-sector model, the total income earned by households is either spent on consumption or invested by firms. Investment represents the portion of income used by firms to acquire new capital goods and expand production.

Question 4. In the two-sector model, the equilibrium level of National Income occurs when

1. Total consumption equals total investment
2. Total savings equals total investment
3. Total consumption equals total savings
4. Total income equals total expenditure

Answer: 3. Total consumption equals total savings

Explanation:

In the two-sector model, the equilibrium level of National Income occurs when total consumption equals total savings. At equilibrium, all produced output is either consumed or saved by households.

Question 5. If total consumption in the two-sector model is greater than total income, the economy will experience

1. An increase in inventories
2. An increase in investment
3. An increase in National Income
4. A decrease in National Income

Answer: 4. A decrease in National Income

Explanation:

If total consumption in the two-sector model is greater than total income, it means households are spending more than their current income, resulting in dissaving. This leads to a decrease in National Income until consumption and income are equalized at equilibrium.

Question 6. In the two-sector model, the income earned by households is allocated between

1. Taxes and Savings
2. Consumption and Savings
3. Consumption and Investment
4. Taxes and Investment

Answer: 2. Consumption and Savings

Explanation:

In the two-sector model, the income earned by households is allocated between consumption (C) and savings (S). Consumption expenditure represents the total spending by households on goods and services, while savings represent the portion of income not spent on consumption.

Question 7. In the two-sector model, the equilibrium condition is achieved when

1. Consumption equals savings
2. Consumption exceeds savings
3. Savings exceed consumption
4. Consumption and savings are both zero

Answer: Consumption equals savings Explanation:

In the two-sector model, equilibrium is achieved when consumption (C) equals savings (S). This means that all income earned by households is either spent on consumption or saved, and there is no leakage from the circular flow of income.’

Question 8. If in the two-sector model, consumption exceeds income, it would result

1. Equilibrium
2. A budget surplus
3. A budget deficit
4. An increase in investment

Answer: 3. A budget deficit.

Explanation:

In the two-sector model, if consumption exceeds income, it would result in a budget deficit. This situation occurs when households are spending more than their income, leading to a shortfall in savings.

Question 9. In the two-sector model, investment is assumed to be

1. Autonomous
2. Derived
3. Dependent on consumption
4. Dependent on government spending

Answer: 1. Autonomous

Explanation:

In the two-sector model, investment is assumed to be autonomous, meaning it is. not directly dependent on the level of income or consumption. It is considered an exogenous variable, determined by factors such as business expectations and government policies.

Question 10. In the two-sector model, the total income earned by households is divided into two components: consumption expenditure (C) and

1. Gross Domestic Product (GDP)
2. Investment (I)
3. Net exports (NX)
4. Savings (S)

Answer: 4. Savings (S)

Explanation:

In the two-sector model, the total income earned by households is divided into two components: consumption expenditure (C) and savings (S). The income that is not spent on consumption is saved.

Question 11. The equilibrium condition in the two-sector model occurs when

1. Savings are greater than investment
2. Consumption equals investment
3. Savings equal investment
4. Consumption equals GDP

Answer: 3. Savings equal investment

Explanation:

The equilibrium condition in the two-sector model occurs when total savings (S) equal total investment (I). At equilibrium, the amount households save is equal to the amount firms invest, ensuring that all income generated in the economy is either consumed or invested.

Question 12. If, in the two-sector model, aggregate savings are greater -than- aggregate investment, the economy is in

1. Recession
2. Equilibrium
3. Inflation
4. Unemployment

Answer: 1. Recession

Explanation:

If aggregate savings (S) are greater than aggregate investment (I) in the two-sector model, it means that households are saving more than what firms are investing. This situation may lead to a decrease in demand and economic slowdown, which is often associated with a recession.

Question 13. The formula for calculating national income (Y) in the two-sector model ‘ is

1. Y = C – S
2. Y = C + S
3. Y = C + I
4. Y = C -I

Answer: 1. Y = C + S

Explanation:

In the two-sector model, national income (Y) is equal to consumption expenditure (C) plus savings (S). This is because all income earned by households is either consumed or saved, so Y = C + S.

Question 14. In the two-sector model of national income determination, the two main sectors are:

1. Household and government
2. Household and business
3. Business and government
4. Government and foreign trade

Answer:  2. Household and business

Question 15. The two-sector model simplifies the economy by considering the interactions between

1. Households and businesses only
2. Households and the government only
3. Businesses and the government only
4. Households and the foreign sector only

Answer: 1. Households and businesses only

Question 16. In the two-sector model, households are the main

1. Producers of goods and services
2. Consumers of goods and services
3. Suppliers of factors of production
4. Investors in the economy

Answer: 2. Consumers of goods and services

Question 17. The two-sector model assumes that all the income earned by households is either:

1. Spent on consumption or saved
2. Spent on consumption or invested
3. Spent on imports or exports
4. Spent on consumption or taxes

Answer: 1. Spent on consumption or saved

Question 18. Investment in the two-sector model refers to

1. The purchase of financial assets by households
2. The purchase of physical capital goods by businesses
3. The government’s spending on infrastructure projects
4. The government’s spending on social welfare programs

Answer: 2. The purchase of physical capital goods by businesses

Question 19. Savings in the two-sector model is equal to

1. Investment
2. Consumption
3. Income earned by households
4. Government spending

Answer: 1. Investment

Question 20. The two-sector model assumes that there is no

1. Government intervention in the economy
2. Unemployment or Inflation
3. Saving or investment in the economy
4. International trade or foreign sector interaction

Answer: 4. International trade or foreign sector interaction

Question 21. In the two-sector model, the equilibrium condition is achieved when

1. Savings are equal to consumption
2. Investment is equal to consumption
3. Investment is equal to savings
4. Savings are equal to government spending

Answer: 3. Investment is equal to savings

Equilibrium With Unemployment Or Inflation

Question 1. In an economy, the aggregate demand (A(d) function is represented as AD = 2,000 -100 P, and the short-run aggregate supply (SRAS) function is represented as SRAS = 1,000 +150P. Calculate the equilibrium price level (P) and output level when the economy is at equilibrium.

1. P = ₹ 6,Y= 1,400
2. P = ₹ 8, Y = 1,200
3. P = ₹ 10, Y = 1,000
4. P = ₹ 12, Y = 800

Answer: 1. P = ₹ 6, Y = 1,400

Solution:

To find the equilibrium price level (P) and output level (Y), we need to set the aggregate demand (AD) equal to the short-run aggregate supply (SRAS) and solve for P and Y.

Equilibrium occurs when AD = SRAS

2,000- 100P = 1,000+ 150P

Combine the terms with P on one side:

2000-10OP – 150P = 1,000

Simplify the equation:

2000- 250P = 1,000

Subtract 2,000 from both sides

-250 P =-1,000

Divide both sides by -250

P = 4

Now that we have the equilibrium price level (P), we can find the output level (Y) by substituting P back into the SRAS function

SRAS = 1,000 + 150P

SRAS = 1,000 + 150 × 4

SRAS = 1,000 + 600 SRAS = 1,600

So, the equilibrium price level (P) is ₹ 6, and the output level (Y) is 1,400.

Question 2. In an economy, the aggregate demand (AD) and short-run aggregate supply (SRAS) functions are given by AD = 2,000 – 100P and SRAS = 1.0 + 150P, where P is the price level. Calculate the equilibrium price level and output level. ,

1. Equilibrium price level: ₹ 8; Output level: 1,400 units
2. Equilibrium price level: ₹ 10; Output level: 1,500 units
3. Equilibrium price level: ₹ 12; Output level: 1,600 units
4. Equilibrium price level: ₹ 6; Output level: 1,200 units

Answer: 1. Equilibrium price level: ₹ 8; Output level: 1,400 units

Solution:

To find the equilibrium price level and output level, we need to set the aggregate. demand (AD) equal to the short-run aggregate supply (SRAS) and solve for P.

AD = SRAS

2000- 100P = 1,000 + 150P

2,000 -1,000 – 150P + 100P

1.0 = 250P

P = \(\frac{1000}{250}\) P = 4

Now, we can find the output level (Y) using either the AD or SRAS function.

Y = AD = 2,000 -100P

= 2,000 – 100 × 4

= 2,000 – 400

= 1,600 units So, the equilibrium price level is ₹  4, and the output level is 1,600 units.

Question 3. In an economy, the aggregate demand (A(d) function is represented as  AD = 2,000 -100P, and the short-run aggregate supply (SRAS) function is represented as SRAS = 500 + 100P. Calculate the equilibrium price level and output level in the economy. 

1. Equilibrium price level = ₹ 8; Equilibrium output level = 1,200 units
2. Equilibrium price level = ₹ 10; Equilibrium output level = 1,000 units
3. Equilibrium price level = ₹ 12; Equilibrium output level = 800 units
4. Equilibrium price level = ₹ 14; Equilibrium output level = 600 units

Answer: 2. Equilibrium price level = ₹ 10; Equilibrium output level = 1,000 units

Solution:

To find the equilibrium price level and output level, we need to equate the aggregate demand (AD) function and the short-run aggregate supply (SRAS) function.

Equating AD and SRAS:

2,000- 100P = 500 + 100P

Now, solve for P

2000- 500 = 100P + 100P

1,500 = 200P

P = 1,500/200 P = 7.5

Now, substitute the value of P into either the AD or SRAS function to find the equilibrium output level:

AD = 2,000 – 100 P.

AD = 2,000-100 × 7.5

AD = 2,000 – 750.

AD = 1,250

So, the equilibrium price level is ₹ 7.5, and the equilibrium output level is 1,250 units.

The Investment Multiplier

Question 1. The investment multiplier measures the relationship between

1. Consumer spending and investment
2. Government spending and investment
3. Investment and changes in national income
4. Changes in national income and consumer spending

Answer: 3. Investment and changes in national income

Explanation:

The investment multiplier measures the relationship between changes in investment and the resulting changes in national income. It shows how an initial change in investment can lead to a more significant overall increase in national income through the multiplier effect.

Question 2. The formula to calculate the investment multiplier is

1. Investment Multiplier = 1 / Marginal Propensity to Consume (MPC)
2. Investment Multiplier = 1 / Marginal Propensity to Save (MPS)
3. r (c) Investment Multiplier = 1 + Marginal Propensity to Consume (MPC)
4. Investment Multiplier = 1 + Marginal Propensity to Save (MPS)

Answer: 1. Investment Multiplier = 1 + Marginal Propensity to Save (MPS)

Explanation:

The formula to calculate the investment multiplier is 1 / (1 – MPS) or equivalently, 1 / MPS. Since MPS (Marginal Propensity to Save) is the proportion of additional income that households save, the investment multiplier is 1 divided by (1 – MPS) or 1 divided by MPS.

Question 3. If the Marginal Propensity to Save (MPS) is 0.2, what is the value of the investment multiplier?

1. 1.2
2. 5
3. 0.2.
4. 0.8.

Answer: 4. 0.8

Explanation:

The investment multiplier is calculated as 1 / (1 – MPS). If MPS is 0.2, then the investment multiplier is 1 / (1 – 0.2)

= \(\frac{1}{0.8}\)

= 5.

Question 4. The investment multiplier indicates that an increase in investment of a certain amount will lead to an

1. Smaller increase in national income
2. Equal decrease in national income
3. Larger increase in national income
4. No change in national income

Answer: 3. Larger increase in national income

Explanation:

The investment multiplier shows that an increase in investment will result in a larger overall increase in national income. For example, if the investment multiplier is 5, an initial increase in investment of ₹ 100 will lead to a total increase in national income of ₹ 500 (5 times the initial investment).

Question 5. The investment multiplier assumes that

1. The economy is at full employment
2. Consumer spending is constant
3. Government spending is constant
4. There are no leakages in the economy

Answer: 4. There are no leakages in the economy

Explanation:

The investment multiplier assumes that there are no leakages in the economy, meaning that all additional income generated through the multiplier effect is spent and not saved or taxed away. In other words, the multiplier effect assumes that the entire increase in income is, spent on consumption and not saved or taxed.

Question 6. The investment multiplier measures the

1. Increase in government spending due to an increase in investment
2. Increase in investment due to an increase in government spending
3. Total change in national income resulting from a change in investment
4. Total change in investment resulting from a change in national income

Answer: 3. Total change in national income resulting from a change in investment

Explanation:

The investment multiplier measures the total change in national income that results from a change in investment. It shows the magnified impact of changes in investment on the overall economy.

Question 7. The value of the investment multiplier is calculated as

1. 1 / Marginal Propensity to Consume (MPC)
2. Marginal Propensity to Consume (MPC) /1
3. 1 / Marginal Propensity to Save (MPS)
4. Marginal Propensity to Save (MPS) /1

Answer: 1 / Marginal Propensity to Save (MPS)

Explanation:

The value of the investment multiplier (K) is calculated as 1 / Marginal Propensity to Save (MPS). It shows how changes in investment lead to a magnified change in national income.

Question 8. If the Marginal Propensity to Consume (MPC) is 0.8, the value of the investment multiplier will be

1. 2
2. 3
3. 4
4. 5

Answer: 3. 4

Explanation:

If the Marginal Propensity to Consume (MPC) is 0.8, the value of the investment multiplier (K) is calculated as 1 / (1 – MPC) = 1 / (1 – 0.8)

=  \(\frac{1}{0.2}\)

= 5. ‘

Question 9. The investment multiplier can be used to calculate the total change in income when there is an autonomous increase in investment. Autonomous investment refers to investment that

1. Depends on changes in income
2. Does not depend on changes in income
3. Is made by the government sector
4. Is made by the foreign sector

Answer: 2. Does not depend on changes in income.

Explanation:

Autonomous investment refers to investment that does not depend on changes in income. It is independent of the level of income in the economy. The investment multiplier helps calculate the total change in income resulting from this autonomous increase in investment.

Question 10. If the investment multiplier is 3, an initial increase in investment of ? 100 million will lead to a total increase in the national income of

1. ? 200 million
2. ? 300 million
3. ? 400 million
4. ? 500 million

Answer: 2. 300 million

Explanation:

If the investment multiplier is 3 and there is an initial increase in investment of ^ 100 million, the total increase in national income will be ? 100 million * 3 = ? 300 million.

Question 11. The investment multiplier measures the

1. Change in investment due to changes in interest rates.
2. Change in investment due to changes in government spending.
3. Change in national income due to changes in investment..
4. Change in consumption due to changes in income.

Answer:  Change in national income due to changes in investment.

Explanation:

The investment multiplier measures the change in national income that results from a change in investment spending. It shows how an initial change in investment can lead to a larger overall impact on the economy through a multiplier effect.

Question 12. The formula for calculating the investment multiplier is

1. Investment Multiplier = 1 / Marginal Propensity to Consume (MPC)
2. Investment Multiplier = 1 / Marginal Propensity to Save (MPS)
3. Investment Multiplier = 1 / Marginal Propensity to Import (MPI)
4. Investment Multiplier = 1 / Marginal Propensity to Invest (MPI)

Answer: 1. Investment Multiplier = 1 / Marginal Propensity to Consume (MPC)

Explanation:

The formula for calculating the investment multiplier is: Investment Multiplier = 1 / Marginal Propensity to Consume (MPC). The marginal propensity to consume (MPC) represents the fraction of additional income that households spend on consumption.

Question 13. If the marginal propensity to consume (MPC) is 0.8, the value of the investment multiplier would be

1. 0.8
2. 5
3. 0.2
4. 2

Answer: 4. 2

Explanation:

If the marginal propensity to consume (MPC) is 0.8, the value of the investment multiplier would be 1 / 0.8 = 2. This means that a change in investment will lead to a two-times larger change in national income due to the multiplier effect.

Question 14. The investment multiplier is based on the idea that an initial change in investment

1. Directly affects consumption spending by households.
2. Indirectly affects consumption and investment spending through changes in interest rates.
3. Indirectly affects consumption spending by households.
4. Directly affects government spending.

Answer: 3. Indirectly affects consumption spending by households. Explanation: .

The investment multiplier is based on the idea that an initial change in investment indirectly affects consumption spending by households. An increase in investment leads to an increase in income, which, in turn, increases consumption spending by households.

Question 15. If the investment multiplier is 4, ₹ 100 million increase in investment will lead to a total increase in national income of

1. ₹ 200 million
2. ₹ 400 million
3. ₹ 600 million
4. ₹ 800 million

Answer: 3. ₹ 600 million

Explanation:

If the investment multiplier is 4, ₹ 100 million increase in investment will lead to a total increase in national income of ₹ 100 million × 4 = ₹ 400 million. The investment multiplier shows the cumulative impact of changes in investment on national income.

Question 16. The investment multiplier is a concept used in economics to measure

1. The impact of changes in investment on the overall economy
2. The efficiency of the financial sector in generating profits
3. The effectiveness of government spending on economic growth
4. The correlation between inflation and unemployment

Answer: 1. The impact of changes in investment on the overall economy

Question 17. The investment multiplier is calculated as the

1. Change in investment divided by the change in national income
2. Change in national income divided by the change in investment
3. Change in consumption divided by the change in investment
4. Change in government spending divided by the change in investment

Answer: 2. Change in national income divided by the change in investment

Question 18. A higher investment multiplier implies that

1. Changes in investment have a larger impact on the overall economy
2. Changes in investment have a smaller impact on the overall economy –
3. The economy is in a recessionary phase
4. The economy is in an inflationary phase

Answer: 1. Changes in investment have a larger impact on the overall economy

Question 19. The investment multiplier process works through

1. Changes in consumer spending due to changes in investment
2. Changes in government spending due to changes in investment
3. Changes in aggregate demand due to changes in investment
4. Changes in aggregate supply due to changes in investment

Answer: 3. Changes in aggregate demand due to changes in investment

Question 20. The value of the investment multiplier is influenced by the

1. Level of government regulation in the economy
2. Level of unemployment in the economy
3. Marginal propensity to consume (MPC) and the marginal propensity to save (MPS)
4. Exchange rate of the national currency

Answer: 3. Marginal propensity to consume (MPC) and the marginal propensity to save (MPS)

Question 21. In an economy with a high investment multiplier, a decrease in investment  can lead to

1. A significant decrease in national income and output
2. An increase in consumer spending to compensate for the decrease in investment
3. An increase in government spending to compensate for the decrease in investment
4. No significant impact on the overall economy

Answer: 1. A significant decrease in national income and output

Question 22. The investment multiplier is a key concept in understanding the impact of

1. Fiscal policy on economic growth
2. Monetary policy on interest rates
3. Foreign trade on exchange rates
4. Supply-side policies on unemployment

Answer: 1. Fiscal policy on economic growth

Question 23. The investment multiplier is a theoretical concept that assumes:

1. Investment has a fixed impact on the economy
2. The economy is in a constant state of equilibrium
3. There are no leakages in the circular flow of income
4. All other factors in the economy remain constant

Answer: 4. All other factors in the economy remain constant

Determination Of Equilibrium Income: Three Sector Model

Question 1. In the three-sector model, the three main sectors of the economy are

1. Government, households, and foreign trade
2. Government, households, and financial institutions
3. Households, firms (businesses), and foreign trade
4. Households, firms (businesses), and financial institutions

Answer:  3. Government, households, and foreign trade

Explanation:

In the three-sector model, the economy consists of three main sectors-. government, households, and foreign trade. Households are the consumers who own factors of production, firms are the producers that use these factors to produce goods and services, and the foreign trade sector represents international trade and transactions.

Question 2. In the three-sector model, the equilibrium condition occurs when

1. Total consumption equals total savings
2. Total income equals total consumption
3. Total income equals total expenditure
4. Total savings equals total investment

Answer: 3. Total income equals total expenditure

Explanation:

In the three-sector model, the equilibrium condition occurs when total income (Y) equals total expenditure (C + I + G + NX), where C is consumption expenditure, I is investment expenditure, G is government expenditure, and NX is net exports (exports minus imports).

Question 3. The formula for calculating the equilibrium level of income (Y) in the three-sector model is

1. Y = C + I + G
2. Y = C + S + T
3. Y = C + I + NX
4. Y = C + I – NX

Answer: 3. Y = C + I + NX

Explanation:

In the thnee-sector model, the formula forcalculating the equilibrium level of income (Y) is Y = C + I + NX, where C is consumption expenditure, I is investment expenditure, and NX is net exports (exports minus imports).

Question 4. If in the three-sector model, total consumption is ? 800 million, total investment is ? 200 million, government expenditure is ? 300 million, and net exports are ? 50 million, the equilibrium level of income (Y) would be

1. ₹ 1.050 million
2. ₹ 1,250 million
3. ₹ 750 million
4. ₹1,350 million

Answer: 2. ₹ 1,250 million

Explanation:

To calculate the equilibrium level of income (Y), we use the formula Y = C + I + NX. Substituting the given values: Y = ₹  800 million (consumption) + ₹  200 million (investment) + ₹ 50 million (net exports) = ₹ 1,050 million.

Question 5. If in the three-sector model, total consumption is ₹ 500 million, total investment is ? 300 million, government expenditure is ₹ 200 million, and net exports are ₹ 50 million (trade deficit), the equilibrium level of income (Y) would be

1. ₹ 1,050 million
2. ₹ 950 million
3. ₹ 750 million
4. ₹ 1,150 million

Answer: 2. ₹ 950 million

Explanation:

To calculate the equilibrium level of income (Y), we use the formula Y = C + I + NX.

Substituting the given values: Y = ₹ 500 million (consumption) + ₹ 300 million (investment) -₹  50 million (net exports) = ₹ 950 million.

Question 6. In a three-sector model, the three main sectors of the economy are

1. Households, firms, and government
2. Households, firms, and foreign trade
3. Households, firms, and banks
4. Households, firms, and financial institutions

Answer: 2. Households, firms, and foreign trade

Explanation:

In a three-sector model, the economy consists of three main sectors – households, firms (businesses), and foreign trade. Households are the consumers, firms produce goods and services, and foreign trade represents international transactions.

Question 7. In a three-sector model, the equilibrium condition occurs when

1. Aggregate savings equal aggregate investment
2. Aggregate consumption equals aggregate income
3. Total exports equal total imports
4. Total government spending equals total tax revenue

Answer: 2. Aggregate consumption equals aggregate income

Explanation:

In a three-sector model, the equilibrium condition occurs when aggregate consumption (C) equals aggregate income (Y). At equilibrium, total income earned in the economy is either consumed, saved, or spent on imports.

Question 8. If, in the three-sector model, aggregate consumption is greater than aggregate income, the economy is in

1. Recession
2. Equilibrium
3. Inflation
4. A trade surplus

Answer: 1. Recession

Explanation:

If aggregate consumption (C) is greater than aggregate income (Y) in the three-sector model, it means that households are spending more than their income, which can lead to decreased savings and economic f slowdown, often associated with a recession.

Question 9. The formula for calculating the equilibrium level of income (Y) in a three-sector model is

1. Y = C -1 + X – M
2. Y = C + I + G
3. Y = C + S + T
4. Y = C + I + X

Answer: 2. Y = C + I + G

Explanation:

In a three-sector model with government (G) included, the formula for calculating the equilibrium level of income (Y) is Y = C + I + G. This equation represents total consumption, investment, and government spending.

Question 10. The concept of the marginal propensity to import (MPM) in a three-sector model refers to

1. The change in government spending due to changes in income.
2. The change in consumption due to changes in income.
3. The change in imports due to changes in income.
4. The change in investment due to changes in interest rates.

Answer: 3. The change in imports due to changes in income.

Explanation:

The concept of the marginal propensity to import (MPM) in a three-sector model refers to the change in imports due to changes in income. It represents the fraction of additional income that is spent on imports.

Question 11. The formula for calculating national income (Y) in the three-sector model is

1. Y = C + S
2. Y = C + I
3. Y = C + T
4. Y = C + T + I

Answer: 4. Y = C + T + I

Explanation:

In the three-sector model, national income (Y) is equal to consumption expenditure (C) plus taxes (T) plus investment (I). This is because all income earned by households is either consumed, saved, or paid in taxes and investment adds to the total income.

Question 12. In the three-sector model, the total income earned by households is divided into three components: consumption expenditure (C), savings (S), and

1. Taxes (T)
2. Investment (I)
3. Exports (X)
4. Government expenditure (G)

Answer: 1. Taxes

Explanation:

In the three-sector model, the total income earned by households is divided into three components: consumption expenditure (C), savings (S), and taxes (T). The income that is not spent on consumption or saved is paid in taxes.

Question 13. The equilibrium condition in the three-sector model occurs when:

1. Total consumption equals total income
2. Total savings equal total investment
3. Total consumption plus total taxes equal total income
4. Total exports equal total imports

Answer: 3. Total consumption plus total taxes equal total income

Explanation:

The equilibrium condition in the three-sector model occurs when total consumption (C) plus total taxes (T) equal total income (Y). At equilibrium, the total income generated in the economy is either consumed, saved, or paid in taxes.

Question 14. If, in the three-sector model, aggregate consumption and taxes are greater than aggregate income, it indicates that

1. The economy is in equilibrium
2. The economy is in recession
3. The economy is facing a surplus
4. The economy is facing a deficit

Answer:  4. The economy is facing a deficit

Explanation:

If aggregate consumption (C) and taxes (T) are greater than aggregate income (Y) in the three-sector model, it indicates that the economy is facing a deficit. This means that households are consuming and paying more in taxes than what they earn as income.

Question 15. In a three-sector model of national income determination, the three main sectors are

1. Household, government, and foreign trade
2. Household, business, and government
3. Business, government, and foreign trade
4. Household, financial, and foreign trade

Answer: 2. Household, business, and government

Question 16. The three-sector model expands the two-sector model by incorporating he role of

1. Government and imports only
2. Government and exports only
3. Government and both imports and exports
4. Foreign trade and exports only

Answer: 3. Government and both imports and exports

Question 17. In the three-sector model, government spending includes

1. Imports and exports of goods and services
2. Taxes and transfers to households
3. Investments in physical capital by businesses
4. Savings and financial investments

Answer: 2. Taxes and transfers to households

Question 18. Equilibrium income in the three-sector model is achieved when

1. Aggregate demand is greater than aggregate supply
2. Aggregate demand is less than aggregate supply
3. Aggregate demand is equal to aggregate supply
4. Aggregate demand is equal to consumption

Answer: 3. Aggregate demand is equal to aggregate supply

Question 19. The equilibrium condition in the three-sector model is represented as

1. Aggregate demand (AD) = Exports (X) + Government spending (G)
2. Aggregate demand (AD) = Consumption (C) + Government spending (G) + Savings (S) .
3. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G)
4. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G) – Imports (M)

Answer: 3. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G)

Question 20. In the three-sector model, leakage refers to

1. Money flowing into the economy due to exports
2. Money flowing out of the economy due to imports
3. Taxes and savings that reduce the flow of income
4. Government spending that increases the flow of income

Answer: 3. Taxes and savings that reduce the flow of income

Question 21. The injection in the three-sector model refers to

1. Money flowing out of the economy due to imports
2. Money flowing into the economy due to exports
3. Government spending and investments that increase the flow of income
4. Savings and taxes that reduce the flow of income

Answer: 3. Government spending and investments that increase the flow of income

Question 22. In the three-sector model, if aggregate demand exceeds aggregate supply it leads to

1. A surplus in the economy
2. An increase in government borrowing
3. Inflationary pressures in the economy
4. A decrease in national income

Answer: 3. A decrease in national income

The Government Sector And Income Determination

Question 1. In an economy, the government purchases of goods and services (G) are ₹ 500 billion, and taxes (T) are? 300 billion, transfer payments (TR) are ₹ 100 billion, and the disposable income (YD) is ₹ 1,500 billion. Calculate the level of government savings or dissavings.

1. Government savings of ₹  200 billion
2. Government dissavings of ₹ 100 billion
3. Government dissavings of ₹  200 billion
4. Government savings of ₹ 100 billion

Answer: 3. Government dissavings of ₹ 200 billion

Solution:

Government savings or dissavings can be calculated using the formula:

Government Savings (or Dissavings) = Taxes (T) – Transfer Payments (TR) – Government Purchases (G)

Government Savings (or Dissavings) = ₹ 300 billion ₹ 100 billion ₹ 500 billion

Government Savings (or Dissavings) = ₹ 300 billion – ₹ 600 billion

Government Savings (or Dissavings) = -₹ 300 billion Since the result is negative, it indicates that the government is running a dissavings or deficit of ₹ 200 billion.

Question 2. In an economy, the government increases its spending on infrastructure projects and welfare programs. As a result, the government expenditure (G) increases by ₹ 100 billion. How will this increase in government expenditure affect the equilibrium level of income in the economy, assuming the marginal propensity to consume (MPC) is 0.8?

1. The equilibrium level of income will increase by ₹ 100 billion.
2. The equilibrium level of income will decrease by ₹ 100 billion.
3. The equilibrium level of income will increase by ₹ 500 billion.
4. The equilibrium level of income will decrease by ₹ 500 billion.

Answer: 4. The equilibrium level of income will increase by ₹ 500 billion.

Solution:

The increase in government expenditure will directly contribute to the aggregate demand (AD) in the economy. The change in equilibrium income (AY) can be calculated using the expenditure multiplier (k), which is given by:

k = 1 / (1 – MPC) where

MPC is the marginal propensity to consume. In this case,.the MPC is 0.8, so the expenditure multiplier is:

k = 1 / (1 -0.8)

= 1 / 0.2 = 5

Now, we can calculate the change in equilibrium income (AY) using the expenditure multiplier:

ΔY =  × ΔG

ΔY = 5 × ₹ 100 billion

ΔY = ₹ 500 billion

So, the increase in government expenditure by ₹100 billion will lead to an increase in the equilibrium level of income by ₹ 500 billion.

Question  3. In an economy, the government increases its spending on infrastructure projects and welfare programs. As a result, the government expenditure (G) increases by X 200 billion. How will this increase in government expenditure affect the equilibrium level of income (Y) in the economy, assuming a simple Keynesian model? «

1. The equilibrium level of income (Y) will increase by X 200 billion.
2. The equilibrium level of income (Y) will decrease by X 200 billion.
3. The equilibrium level of income (Y) will not change. .
4. The equilibrium level of income (Y) will change, but the direction of change cannot be determined without more information.

Answer: 1. The equilibrium level of income (Y) will increase by X 200 billion.

Solution:

In a simple Keynesian model, an increase in government expenditure (G) will have a multiplier effect on the equilibrium level of income (Y). The multiplier effect arises because an increase in government expenditure leads to an increase in aggregate demand, which in turn leads to an increase in production and income.

The formula for the multiplier effect is given by:

Multiplier =1/(1 – MP(c)

Where MPC is the marginal propensity to consume.

Since the question doesn’t provide the value of MPC, we assume that MPC is 0.8 (which means that 80% of any increase in income will be. consume (d).

With MPC = 0.8, the multiplier will be:

Multiplier*1 / (1 -0.8) = 1 /0.2 = 5

Now, if the government increases its expenditure (G) by X 200 billion, the increase in income (Y) will be:

Increase in income (Y) = Multiplier* Increase in government expenditure (G)

Increase in income (Y) = 5 × ₹ 200 billion = ₹ 1,000 billion

So, the equilibrium level of income (Y) will increase by ₹ 200 billion due to the increase in government expenditure.

Question 4. In an economy, the government purchases (G) are ₹ 500 billion, taxes (T) are ₹ 300 billion, transfer payments (TR) are ₹ 100 billion, and the disposable income (YD) is ₹ 1,800 billion. Calculate the level of government savings or dissavings (Sg).

1. Government savings (Sg) = ₹ 100 billion
2. Government savings (Sg) = – ₹ 100 billion
3. Government savings (Sg) = ₹ 300 billion
4. Government savings (Sg) = – ₹  300 billion

Answer: 2. Government savings (Sg) = – ₹ 100 billion

Solution:

Government savings or dissavings (Sg) can be calculated using the formula

Sg = (T + TR) – G

Sg = (₹ 300 billion + ₹ 100 billion) – ₹ 500 billion

Sg = ₹ 400 billion – ₹ 500 billion Sg = -₹ 100 billion

Since the result is negative, it indicates that the government is running a deficit or dissaving of X 100 billion.

So, the correct answer is  Government savings (Sg) = -X 100 billion.

Determination Of Equilibrium Income Four-Sector Model

Question 1. In the four-sector model, the total income earned by households is divided into four components: consumption expenditure (C), savings (S), taxes (T), and

1. Exports (X)
2. Imports (M)
3. Investment (I)
4. Government expenditure (G)

Answer: 3. Investment (I)

Explanation:

In the four-sector model, the total income earned by households is divided into four components: consumption expenditure (C), savings (S), taxes (T), and investment (I). Investment represents the amount businesses invest in new capital goods.

Question 2. The equilibrium condition in the four-sector model occurs when

1. Total consumption equals total income
2. Total savings equal total investment
3. Total consumption plus total taxes equal total income
4. Total exports equal total imports

Answer: 3. Total consumption plus total taxes equal total income

Explanation:

The equilibrium condition in the four-sector model occurs when total consumption (C) plus total taxes (T) equals total income (Y). At equilibrium, the total income generated in the economy is either consumed, saved, paid in taxes, or invested.

Question 3. If, in the four-sector model, aggregate consumption and taxes are greater than aggregate income, it indicates that

1. The economy is in equilibrium
2. The economy is in recession
3. The economy is facing a surplus
4. The economy is facing a deficit

Answer: 4. The economy is facing a deficit

Explanation:

If aggregate consumption (C) and taxes (T) are greater than aggregate income (Y) in the four-sector model, it indicates that the economy is facing a deficit. This means that households are consuming and paying more in taxes than what they earn as income.

Question 4. In the four-sector model, the net exports (NX) component represents

1. Total consumption by households
2. Total government expenditure
3. Total investment by firms.
4. The difference between exports (X) and imports (M)

Answer: 4. The difference between exports (X) and imports (M)

Explanation:

In the four-sector model, the net exports (NX) component represents the difference between exports (X) and imports (M). If exports exceed imports

(NX > 0), the economy has a trade surplus, and if imports exceed exports (NX < 0), the economy has a trade deficit.

Question 5. The formula for calculating national income (Y) in the four-sector model is

1. Y = C + S
2. Y = C + T
3. Y = C + T + I
4. Y = C + T + I + NX

Answer: 4. Y = C + T + I + NX

Explanation:

In the four-sector model, national income (Y) is equal to consumption expenditure (C) plus taxes (T) plus investment (I) plus net exports (NX). This formula accounts for all the components that determine the total income earned in the economy.

Question 6. In the four-sector model, the four main sectors of the economy are

1. Households, firms (businesses), government, and foreign trade
2. Households, firms (businesses), government, and financial institutions
3. Households, firms (businesses), government, and banks
4. Households, firms (businesses), government, and central bank

Answer: 1. Households, firms (businesses), government, and foreign trade

Explanation:

In the four-sector model, the economy consists of four main sectors – households, firms ‘(businesses), government, and foreign trade. Households are the consumers, firms are the producers, the government represents public expenditure, and foreign trade represents international transactions.

Question 7. In the four-sector model, the total income earned by households is divided into four components: consumption expenditure ((c), savings (S), taxes (T), and

1. Imports (M)
2. Exports (X)
3. Government expenditure (G)
4. Investments (I)

Answer: 2. Exports (X)

Explanation:

In. the four-sector model, the total income earned by households is divided into four components: consumption expenditure (C), savings (S), taxes (T), and exports (X). Exports represent the income earned from ‘ foreign trade.

Question 8. The equilibrium condition in the four-sector model occurs when

1. Total consumption plus total taxes equal total income
2. Total consumption plus total investment equal total income
3. Total savings plus total investment equals total income
4. Total exports equal total imports

Answer: 1. Total savings plus total investment equal total income

Explanation:

The equilibrium condition in the four-sector model occurs when total savings (S) plus total investment (I) equals total income (Y). At equilibrium, the total income generated in the economy is either consumed, saved, or invested.

Question 9. If, in the four-sector model, aggregate consumption, taxes, and imports are greater than aggregate income, it indicates that

1. The economy is in equilibrium
2. The economy is in recession
3. The economy is facing a surplus
4. The economy is facing a deficit

Answer: 4. The economy is facing a deficit

Explanation:

If aggregate consumption (C), taxes (T), and imports (M) are greater than aggregate income (Y) in the four-sector model, it indicates that the economy is facing a deficit. This means that households are consuming, paying taxes, and importing more than what they earn as income.

Question 10. The formula for calculating national income (Y) in the four-sector model is: 

1. Y = C + S
2. Y = C + I ,
3. Y = C + T + X
4. Y = C + T + I + X – M

Answer: 4. Y = C + T + I + X- M

Explanation:

In the four-sector model, national income (Y) is equal to consumption expenditure (C) plus taxes (T) plus investment (I) plus exports (X) minus imports (M). This formula accounts for all components of income and expenditure in the economy.

Question 11. In a four-sector model of national income determination, the four main sectors are

1. Household, government, business, and foreign trade.
2. Household, government, business, and financial
3. Household, government, business, and exports
4. Business, government, foreign trade, and financial

Answer: 1. Household, government, business, and foreign trade.

Question 12. The four-sector model expands the three-sector model by incorporating the role of

1. Government and imports only
2. Government and exports only
3. Foreign trade and exports only
4. The financial sector and imports only

Answer: 1. Government and imports only

Question 13. In the four-sector model, net exports (NX) represent the difference between

1. Government spending (G) and taxes (T)
2. Exports (X) and imports (M)
3. Savings (S) and investments
4. Consumption (C) and investment (I)

Answer: 2. Exports (X) and imports (M)

Question 14. Equilibrium income in the four-sector model is achieved when

1. Aggregate demand is greater than aggregate supply
2. Aggregate demand is less than aggregate supply
3. Aggregate demand is equal to aggregate supply
4. Aggregate demand is equal to consumption

Answer: 3. Aggregate demand is equal to aggregate supply

Question 15. The equilibrium condition in the four-sector model is represented as:

1. Aggregate demand (AD) = Consumption (C) + Government spending (G) + Savings (S)
2. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G) + Net exports (NX)
3. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G) – Net exports (NX)
4. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G) – Taxes (T)

Answer: 2. Aggregate demand (AD) = Consumption (C) + Investment (I) + Government spending (G) + Net exports (NX)

Question 16. In the four-sector model, the net exports (NX) are negative when

1. Imports exceed exports
2. Exports exceed imports
3. Government spending exceeds taxes
4. Savings exceed investments

Answer:  1. Imports exceed exports

Question 17. The leakage in the four-sector model refers to

1. Money flowing into the economy due to exports ,
2. Money flowing out of the economy due to imports
3. Taxes, savings, and imports that reduce the flow of income
4. Government spending and investments that increase the flow of income

Answer: 3. Taxes, savings, and imports that reduce the flow of income

Question 18. The injection in the four-sector model refers to

1. Money flowing out of the economy due to imports
2. Money flowing into the economy due to exports
3. Government spending, exports, and investments that increase the flow of income
4. Taxes, savings, and imports that reduce the flow of income

Answer: 3. Government spending, exports, and investments that increase the flow of income

Conclusion

Question 1. According to the Keynesian theory, during an economic recession, the government should

1. Decrease government spending to reduce budget deficits.
2. Increase taxes to control inflation.
3. Increase government spending to stimulate aggregate demand.
4. Decrease interest rates to encourage private investment.

Answer: 3. Increase government spending to stimulate aggregate demand.

Explanation:

According to the Keynesian theory, during an economic recession, the government should increase government spending to stimulate aggregate demand. This increase in government expenditure will help boost economic activity and create demand for goods and services, leading to higher employment and economic growth.

Question 2. The Keynesian theory emphasizes that in times of economic downturns, the primary cause of unemployment is

1. Technological advancements lead to job losses.
2. Structural changes in the economy.
3. Insufficient aggregate demand.
4. Excessive government intervention.

Answer: 3. Insufficient aggregate demand.

Explanation:

The Keynesian theory emphasizes that in times of economic downturns, the primary cause of unemployment is insufficient aggregate demand. When overall demand for goods and services is low, firms reduce production and lay off workers, leading to higher unemployment.

Question 3. The concept of the “Multiplier Effect” in the Keynesian theory suggests that

1. Government spending has a larger impact on national income than changes in taxes.
2. A change in investment leads to a proportionate change in national income.
3. Increases in exports result in higher economic growth and employment.
4. Changes in consumption have a direct and immediate impact on investment.

Answer:  2. A change in investment leads to a proportionate change in national income.

Explanation:

The concept of the “Multiplier Effect” in the Keynesian theory suggests that a change in investment leads to a proportionate change in national income. It demonstrates how an initial change in investment can set off a chain reaction of increased spending, leading to a larger overall impact on national income.

Question 4. According to the Keynesian theory, during periods of high inflation, the government should focus on

1. Increasing government spending to boost aggregate demand
2. Reducing taxes to encourage consumption.
3. Decreasing money supply and raising interest rates to control spending.
4. Encouraging private investment through tax incentives.

Answer: 3. Decreasing money supply and raising interest rates to control spending

Explanation:

According to the Keynesian theory, during periods of high inflation, the government should focus on decreasing the money supply and raising interest rates to control spending. These measures help to reduce aggregate demand, curb inflationary pressures, and stabilize the economy.

Question 5. The Keynesian theory highlights that during economic downturns, there may be a role for the government to engage in

1. Active fiscal and monetary policies to stabilize the economy.
2. Laissez-faire and minimal government intervention.
3. Decreasing public expenditure to reduce budget deficits.
4. Reducing public debt to promote economic growth.

Answer: 1. Active fiscal and monetary policies to stabilize the economy.

Explanation:

The Keynesian theory highlights that during economic downturns, there may be a role for the government to engage in active fiscal and monetary policies to stabilize the economy. These policies involve adjustments in government spending, taxation, and money supply to address fluctuations in aggregate demand and promote economic stability.

Question 6. The conclusion of the Keynesian theory of the determination of national income is that

1. The government should play a minimal role in the economy.
2. Government intervention is necessary to stabilize the economy and achieve full employment.
3. The economy will always be in a state of equilibrium without any government intervention.
4. Monetary policy is the most effective tool to control inflation and f unemployment

Answer: 2. Government intervention is necessary to stabilize the economy and achieve full employment.

Explanation:

The Keynesian theory concludes that during periods of economic downturns, the government should use fiscal policy (government spending and taxation) to stimulate aggregate demand and stabilize the economy. By increasing government spending during recessions, the k government can create more jobs and boost economic activity to achieve full employment.

Question 7. According to the Keynesian theory, during times of economic recession, the government should: ‘

1. Decrease taxes to boost consumer spending.
2. Decrease government spending to reduce budget deficits.
3. Increase taxes to reduce inflation.
4. Increase government spending to stimulate aggregate demand.

Answer: 4. Increase government spending to stimulate aggregate demand.

Explanation:

During times of economic recession, the Keynesian theory recommends that the government should increase its spending to stimulate aggregate demand. This increased government spending will create more jobs, boost consumer spending, and help the economy recover from the recession.

Question 8. The Keynesian theory suggests that changes in aggregate demand can lead to fluctuations in:

1. The exchange rate.
2. Interest rates
3. Unemployment and inflation.
4. Stock market prices.

Answer: 3. Unemployment and inflation.

Explanation:

The Keynesian theory highlights that changes in aggregate demand can lead to fluctuations in unemployment and inflation. During periods of low aggregate demand, there is a risk of higher unemployment, and during periods of high aggregate demand, there is a risk of inflationary pressures.

Question 9. The primary focus of the Keynesian theory is on

1. Long-term economic growth.
2. Achieving price stability.
3. Short-run economic fluctuations and stabilizing the economy.
4. Increasing international trade.

Answer: 3. Short-run economic fluctuations and stabilizing the economy.

Explanation:

The -Keynesian theory primarily focuses on short-run economic fluctuations and how to stabilize the economy during periods of • recession or depression. It emphasizes the importance of government intervention to achieve full employment and economic stability.

Question 10. The Keynesian theory influenced the development of economic policies during

1. The Great Depression in the 1930s.
2. The Industrial Revolution in the 18th century.
3. The Renaissance period in Europe.
4. The post-World War II era.

Answer: 1. The Great Depression in the 1930s.

Explanation:

The Keynesian theory gained prominence during the Great Depression in the 1930s when John Maynard Keynes published his seminal work, “The General Theory of Employment, Interest, and Money.” It had a significant impact on economic policies aimed at addressing the economic challenges of the Great Depression.

Question 11. The Keynesian theory emphasizes the role of in influencing national income.

1. Aggregate supply
2. Government policies
3. Foreign trade
4. Business investments

Answer: 2. Government policies

Question 12. According to the Keynesian theory, during periods of economic downturns, the government should use it to stimulate economic growth. ,

1. Monetary policy
2. Supply-side policies
3. Fiscal policy
4. Trade policies

Answer: 3. Fiscal policy

Question 13. The concept of “effective demand” in the Keynesian theory highlights the importance of

1. Government spending on infrastructure projects
2. The total demand for goods and services in the economy
3. The level of savings and investments in the economy
4. The role of foreign trade in influencing national income

Answer: 2. The total demand for goods and services in the economy

Question 14. The Keynesian theory suggests that if there is insufficient aggregate demand in the economy, the government should

1. Reduce government spending and lower taxes
2. Increase government spending and lower taxes
3. Increase interest rates to encourage savings
4. Decrease interest rates to promote borrowing and investment

Answer: 2. Increase government spending and lower taxes

Question 15. In the Keynesian model, full employment equilibrium can only be ‘ achieved with

1. An increase in government regulations and control
2. The proper functioning of the financial sector
3. The active role of the government in managing aggregate demand
4. A balanced budget and reduced government intervention

Answer: 3. The active role of the government in managing aggregate demand

Question 16. The Keynesian theory gained popularity during the

1. Great Depression of the 1930s
2. Industrial Revolution of the 18th century
3. Renaissance era in Europe
4. Dot-com bubble of the late 1990s

Answer: 1. Great Depression of the 1930s

Question 17. Keynes argued that in the long run

1. Government intervention is unnecessary in the economy
2. Supply creates its demand
3. The economy will automatically reach full employment
4. The impact of government policies on aggregate demand diminishes

Answer: 4. The impact of government policies on aggregate demand diminishes

Question  18. The Keynesian theory’s focus on aggregate demand and government intervention has had a significant influence on the development of modern

1. Classical economics
2. Monetarist economics
3. Neoclassical economic
4. Macroeconomics

Answer: 4. Macroeconomics