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Ch 4 Determination of Income and Employment

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Class 12 • Introductory Macroeconomics

NCERT Class 12 Economics Chapter 4 Questions (MCQ, One-Word or Descriptive)

This page provides complete NCERT Class 12 Introductory Macroeconomics Chapter 4 questions, including MCQs, one-word and descriptive questions. All questions are extracted line-by-line from NCERT for full syllabus coverage and exam preparation.

This chapter, Determination of Income and Employment, introduces Keynesian macroeconomic theory to explain how national income and employment are determined in the short run, assuming fixed prices and constant interest rates.

It begins by distinguishing between ex ante (planned) and ex post (actual) values of variables like consumption, investment, and output. The consumption function is expressed as C = \overline{C} + cY, where \overline{C} is autonomous consumption (independent of income) and c is the marginal propensity to consume (MPC) — the fraction of additional income spent on consumption. MPC lies between 0 and 1, and MPC + MPS = 1 (where MPS is marginal propensity to save). Investment is taken as autonomous: I = \overline{I}.

In the two-sector model (households and firms), equilibrium occurs where ex ante aggregate demand equals ex ante aggregate supply: Y = \overline{C} + \overline{I} + cY. Solving gives equilibrium income Y = (\overline{C} + \overline{I}) / (1 – c). Graphically, equilibrium is where the aggregate demand line (C + I) intersects the 45° line (which represents aggregate supply).

When autonomous expenditure increases (e.g., a rise in I), it triggers the multiplier mechanism: the initial increase in output generates additional income, leading to further consumption and output increases in successive rounds. The total increase in output is a multiple of the initial change: Investment multiplier = 1/(1 – MPC) = 1/MPS. With MPC = 0.8, the multiplier is 5; an autonomous increase of 10 raises output by 50.

The chapter explains the Paradox of Thrift: if everyone tries to save more (increasing MPS/decreasing MPC), aggregate demand falls, leading to lower output and income, and total savings may remain unchanged or even fall. The process is shown as a downward swing of the AD line due to reduced slope.

Finally, the distinction is made between full employment level of income (all factors employed) and equilibrium level of income (where Y = AD). Equilibrium may be below full employment (deficient demand, leading to price declines) or above full employment (excess demand, leading to price rises). The Keynesian model thus provides a framework to understand unemployment equilibria and the role of autonomous expenditure changes in determining output.

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Section A: Descriptive Questions

  1. What is the meaning of ceteris paribus? Page 53
  2. What is the difference between ex ante and ex post measures? Page 53-54
  3. What is a consumption function? Write its equation and explain each term. Page 54
  4. What is autonomous consumption? Page 54
  5. Define Marginal Propensity to Consume (MPC). Page 54-55
  6. What is the relationship between MPC and MPS? Page 55
  7. What is investment? What are its two components? Page 56
  8. In the two-sector model without government, what is the equilibrium condition for final goods market? Page 56
  9. What is unplanned inventory investment? When does it occur? Page 57
  10. Why is the price level assumed fixed in the short-run Keynesian model? Page 57
  11. What does the 45° line represent in the Keynesian cross diagram? Page 59
  12. How is equilibrium income determined algebraically in a two-sector model? Page 60
  13. What is the investment multiplier? Derive its formula. Page 62
  14. Explain the multiplier mechanism step by step using an example where MPC = 0.8 and autonomous investment increases by 10. Page 61-62
  15. What is the Paradox of Thrift? Explain with an example. Page 63-64
  16. What is the difference between full employment level of income and equilibrium level of income? Page 64
  17. What is deficient demand? What happens when equilibrium output is less than full employment output? Page 64
  18. What is excess demand? What happens when equilibrium output exceeds full employment output? Page 64
  19. What is the expression for the investment multiplier when MPC is known? Page 62

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Section B1: Objective MCQs

Page 53

The theoretical model in this chapter is based on the theory given by which economist?

A) Milton FriedmanB) John Maynard KeynesC) Adam SmithD) Joseph Schumpeter
View Answer
Correct Answer: John Maynard Keynes
Reference: NCERT Page 53
Page 55

If C = 100 + 0.8Y, what is the autonomous consumption?

A) 0.8B) 100C) 0.2D) 80
View Answer
Correct Answer: 100
Reference: NCERT Page 55
Page 55

If C = 100 + 0.8Y, what is the marginal propensity to consume?

A) 0.2B) 0.8C) 100D) 80
View Answer
Correct Answer: 0.8
Reference: NCERT Page 55
Page 54

If income increases by Rs 100 and consumption increases by Rs 80, the MPC is

A) 0.2B) 0.8C) 1D) 1.2
View Answer
Correct Answer: 0.8
Reference: NCERT Page 54
Page 55

If MPC = 0.8, the MPS is

A) 0.2B) 0.8C) 1D) 1.2
View Answer
Correct Answer: 0.2
Reference: NCERT Page 55
Page 60

If C = 40 + 0.8Y and I = 10, the equilibrium income is

A) 200B) 250C) 300D) 350
View Answer
Correct Answer: 250 (Y = 50/(0.2) = 250)
Reference: NCERT Page 60
Page 60

If C = 40 + 0.8Y and I increases from 10 to 20, the new equilibrium income is

A) 250B) 300C) 350D) 400
View Answer
Correct Answer: 300 (Y = 60/(0.2) = 300)
Reference: NCERT Page 60
Page 62

In the multiplier mechanism with MPC = 0.8 and initial autonomous increase of 10, the total increase in output is

A) 10B) 20C) 40D) 50
View Answer
Correct Answer: 50
Reference: NCERT Page 62
Page 63-64

In the Paradox of Thrift example, when MPC falls from 0.8 to 0.5 and autonomous expenditure is 50, the new equilibrium output is

A) 250B) 150C) 100D) 50
View Answer
Correct Answer: 100 (50/(1-0.5)=100)
Reference: NCERT Page 63-64
Page 63

In the Paradox of Thrift example, savings at the old equilibrium (Y=250, MPC=0.8) was

A) 5B) 10C) 15D) 20
View Answer
Correct Answer: 10
Reference: NCERT Page 63
Page 63

In the Paradox of Thrift example, savings at the new equilibrium (Y=100, MPC=0.5) is

A) 5B) 10C) 15D) 20
View Answer
Correct Answer: 10
Reference: NCERT Page 63
Page 62

If the multiplier is 4, the MPC is

A) 0.25B) 0.5C) 0.75D) 0.8
View Answer
Correct Answer: 0.75 (4 = 1/(1-MPC) → 1-MPC=0.25 → MPC=0.75)
Reference: NCERT Page 62
Page 62

If the multiplier is 4, the MPS is

A) 0.25B) 0.5C) 0.75D) 0.8
View Answer
Correct Answer: 0.25
Reference: NCERT Page 62
Page 59

The aggregate demand function in a two-sector model is parallel to the consumption function because they have the same

A) InterceptB) Slope (c)C) Vertical interceptD) Horizontal intercept
View Answer
Correct Answer: Slope (c)
Reference: NCERT Page 59
Page 60-61

When autonomous investment increases, the AD line shifts

A) DownwardsB) Upwards in parallelC) Swings downwardsD) Swings upwards
View Answer
Correct Answer: Upwards in parallel
Reference: NCERT Page 60-61
Page 63-64

When MPC decreases, the AD line

A) Shifts upwardsB) Shifts downwardsC) Swings downwards (slope decreases)D) Swings upwards
View Answer
Correct Answer: Swings downwards (slope decreases)
Reference: NCERT Page 63-64
Page 56

Which of the following is NOT a component of ex ante aggregate demand?

A) Consumption expenditureB) Investment expenditureC) Government expenditure (when ignored)D) Depreciation
View Answer
Correct Answer: Depreciation
Reference: NCERT Page 56
Page 59

What does the 45° line represent in the Keynesian cross diagram?

A) Aggregate demandB) Aggregate supplyC) Investment functionD) Saving function
View Answer
Correct Answer: Aggregate supply
Reference: NCERT Page 59

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Section B2: Factual One-Liners

The sum of the infinite geometric series a + ar + ar² + … for 0 Page 68

Reveal Answer
a/(1 – r) (Page 68)

In the graphical method, the aggregate demand function is obtained by Page 59

Reveal Answer
Vertically adding the consumption and investment functions (Page 59)

What is the Latin term meaning “other things remaining equal”? Page 53

Reveal Answer
Ceteris paribus (Page 53)

What is the term for planned values of variables? Page 54

Reveal Answer
Ex ante (Page 54)

What is the term for actual or accounting values of variables? Page 54

Reveal Answer
Ex post (Page 54)

What is the full form of MPC? Page 54

Reveal Answer
Marginal Propensity to Consume (Page 54)

What is the full form of MPS? Page 55

Reveal Answer
Marginal Propensity to Save (Page 55)

What is the full form of APC? Page 55

Reveal Answer
Average Propensity to Consume (Page 55)

What is the full form of APS? Page 55

Reveal Answer
Average Propensity to Save (Page 55)

What is the formula for the investment multiplier? Page 62

Reveal Answer
Multiplier = 1/(1 – MPC) = 1/MPS (Page 62)

What is the name of the result that states increased thriftiness leads to same or lower savings? Page 63

Reveal Answer
Paradox of Thrift (Page 63)

What is the level of income where all factors of production are fully employed called? Page 64

Reveal Answer
Full employment level of income (Page 64)

When the equilibrium level of output is less than full employment output, what situation exists? Page 64

Reveal Answer
Deficient demand (Page 64)

When the equilibrium level of output exceeds full employment output, what situation exists? Page 64

Reveal Answer
Excess demand (Page 64)

In Fig. 4.2, what does the intercept of the consumption function represent? Page 58

Reveal Answer
Autonomous consumption (\overline{C}) (Page 58)

In Fig. 4.2, what does the slope of the consumption function represent? Page 58

Reveal Answer
Marginal Propensity to Consume (c) (Page 58)

In the example Imagania, if C = 100 + 0.8Y and Y increases by Rs 100, by how much does consumption increase? Page 55

Reveal Answer
Rs 80 (Page 55)
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