Determination of Income and Employment (Frequently asked Questions)

Read this article to learn about the most frequently asked questions on Determination of Income and Employment.

Q. 1. Give the meaning of aggregate demand?

Ans. The total demand for final goods and services in an economy in a given period is called aggregate demand.

Q. 2. What is consumption function?

Ans. The consumption function shows functional relationship between consumption and income.

Q. 3.What is aggregate supply?

Ans. Aggregate supply is the total amount of all goods and services available for purchase in an economy during a given period.

Q. 4. Give the meaning of autonomous consumption?

Ans. The consumption expenditure at zero level of income is called autonomous consumption expenditure.

Q. 5.What is full employment?

Ans. The situation, when every able bodied person who is willing to work at the prevailing wage rate, is actually employed, represents full employment.

Q. 6.When is aggregate supply perfectly elastic?

Ans. Aggregate Supply is perfectly elastic till full employment level, since output can be increased till full employment level by employing more resources.

Q. 7. When is aggregate supply perfectly inelastic?

Ans. Aggregate supply is perfectly inelastic at full employment level of output.

Q. 8. Give the meaning of Marginal Propensity to Save.

Ans. Ratio of change in savings to change in income.

Q. 9. What can be the maximum value of MPS?

Ans. The maximum value of MPS can be one.

Q. 10. What is the value of MPC when MPS = 0?

Ans. If MPS = 0, the value of MPC will be 1, since MPC = 1 – MPS

Q. 11 How is value of marginal propensity to save calculated?

Ans. MPS= Change in Savings / Change in Income =∆S/∆Y

Q. 12. What is psychological law of consumption?

Ans. According to the psychological law of consumption, the rate of increase in consumption is always less than the rate of increase in income.

Q.13. What is average propensity to consume?

Ans. The ratio of aggregate consumption expenditure to aggregate income is called average propensity to consume.

Q.14. Define average propensity to consume.

Ans. Average Propensity to consume is the ratio between total consumption expenditure and total income.

APC= Total Consumption Expenditure / Total Income = C/Y

Q. 15. What is marginal propensity to consume?

Ans. The ratio of change in consumption expenditure to change in income is called marginal propensity to consume.

Q. 16. Define saving.

Ans. The part of income not spent on consumption is called saving.

Q. 17. What is breakeven point?

Ans. The breakeven point is where consumption expenditure is equal to the income.

Q. 18. What is the relationship between MPC and MPS?

Ans. MPC + MPS = 1

Q. 19. What is the relationship between APS and APC?

Ans. APC + APS = 1

Q. 20. What is marginal efficiency of investment?

Ans. Expected rate of return on an additional unit of investment is called marginal efficiency of investment.

Q. 21. How does interest rate affect the investment?

Ans. An increase in interest rate will decrease the investment and a decrease in interest rate will increase the investment.

Q. 22. What is voluntary unemployment?

Ans. Voluntary unemployment is when some people are not willing to work, though suitable work is available for them.

Q. 23. Define involuntary unemployment.

Ans. Involuntary unemployment is when all able persons who are willing to work at the prevailing wage rate are unable to get the work.

Q. 24. Define Multiplier.

Ans. Multiplier is the ratio of change in national income to change in investment.

Q. 25. What is Paradox of Thrift?

Ans. Paradox of thrift states that if all the people in an economy start saving more, the total savings in the economy will either decrease or remain unchanged.

Q. 26. What is meant by excess demand in macroeconomics?

Ans. The excess of aggregate demand over aggregate supply at full employment level is known as excess demand.

Q.27. What is the meaning of inflationary gap?

Ans. The excess of aggregate demand over aggregate supply at full employment level is called inflationary gap.

Q. 28. What is deficient demand?

Ans. If aggregate demand is less than aggregate supply at full employment level it is called as deficient demand.

Q. 29. Give the meaning of Deflationary gap?

Ans. Excess of Aggregate supply over aggregate demand at full employment level.

Q. 30. What are trade cycles?

Ans. The ups and downs of business activities are called trade cycles.

Q. 31. What is fiscal policy?

Ans. Fiscal policy is the policy of the government regarding taxation and its expenditure.

Q. 32. What is monetary policy?

Ans. The policy of the Central Bank of a country relating to control of money supply and availability of credit in the economy is known as monetary policy.

Q. 33. What is dear money policy?

Ans. When availability of credit is restricted, it is called dear money policy.

Q. 34. What is cheap money policy?

Ans. When availability of credit is increased, it is called cheap money policy

Q. 35. Name any two fiscal policy measures to reduce deflationary gap.

Ans. To Reduce Deflationary Gap:

(i) The government should reduce taxes so that aggregate demand increases.

(ii) The government should increase its expenditure

It will raise the income and thereby increase the aggregate demand.

Q. 36. Name two fiscal policy measures to reduce inflationary gap.

Ans. To Reduce the Inflationary Gap:

(a) The taxes should be raised by the government, and

(b) The government should also reduce its expenditure.

Q. 37.When is there the equilibrium level of National Income?

Ans. Level of income at which AD = AS or S = 1

Q. 38. What happens to the level of national income, if aggregate demand falls short of aggregate supply?

Ans. The level of national income will fall.

Q. 39. What happens to the level of national income, if aggregate demand is greater than aggregate supply?

Ans. The level of national income will increase.

Q. 40. State one component of aggregate demand.

Ans. Household consumption expenditure.

Q. 41. What is meant by saving function?

Ans. Saving function shows functional relationship between saving and income.

Q. 42. What is meant by equilibrium in Macro Economics?

Ans. Equilibrium in macro economics means the situation where aggregate demand equals aggregate supply or where savings equal investment.

Q. 43. What is under employment equilibrium?

Ans. Under employment equilibrium is when AD and AS are equal at less than full employment level.

Q. 44. What are the components of aggregate demand?

Ans. (i) Household consumption demand

(ii) Investment demand

(iii) Government demand for goods and services

(iv) Net exports (i.e. Exports-Imports)

Q. 45. Define investment.

Ans. Investment is addition made to capital stock of a country during a given period of time.

Q. 46. Give the meaning of ex-ante savings?

Ans. It is planned or intended amount of saving at different levels of income.

Q. 47. Give the meaning of ex-ante investment.

Ans. It is the planned/expected investment.

Q. 48. What is ex-ante aggregate demand.

Ans. It is planned aggregate demand.

Q. 49. Define saving.

Ans. It is actual saving in an economy during a given period.

Q. 50. Define induced investment.

Ans. When investment is induced by income or profit motive, it is known as induced investment.

Q.51. What is meant by autonomous investment?

Ans. It is the investment which is independent of income or profit motive.

Q.52. Minimum value of Multiplier depends upon Minimum Value of MPC. What is this minimum value?

OR

What can be the minimum value of investment multiplier?

Ans. Minimum value of multiplier is 1.

Q. 53. Maximum value of Multiplier depends upon maximum value of MPC. What is this maximum value?

Ans. Maximum value of multiplier is infinity (∞).

Q. 54. If investment multiplier is 1, what will be the value of Marginal Propensity to Consume?

Ans. Zero.

Q. 55. What is meant by Non discretionary measures? Give examples.

Ans. They can be called as inbuilt stabilizers which operate automatically e.g. transfer payments like old age pension, subsidies, grants, progressive Income Tax etc.

Q. 56. What is the next name given to Income Elastic Investment?

Ans. Induced Investment or private investment

Q. 57. What is the next name given to Income Inelastic Investment?

Ans. Autonomous / Government investment.

Q. 58. Relation between Actual Investment & Planned Investment?

Ans. Actual Investment = Planned Investment + Unplanned Investment.