Chapter-3 Determination of Income and Employment — Online MCQ Test
ECONOMICS · Grade 12 · CBSE(NCERT)
Practice Chapter-3 Determination of Income and Employment with a free chapter-wise online MCQ test.
This chapter covers: aggregate demand - propensity to consume - propensity to save - investment multiplier - excess demand - deficient demand.
AI-generated questions from basic to board-exam level, with instant results and explanations.
Chapter-3 Determination of Income and Employment — Important Questions & Answers
What is Aggregate Demand (AD) in macroeconomics?
- A. Total demand for goods and services by all sectors of the economy at different price levels
- B. Only the demand for consumer goods in the economy
- C. The demand created by the government alone
- D. The total supply of goods in the economy
Answer: A. Total demand for goods and services by all sectors of the economy at different price levels
Aggregate demand represents the total demand for final goods and services in an economy at various price levels, consisting of consumption, investment, government spending, and net exports.
Aggregate demand represents the total demand for final goods and services in an economy at various price levels, consisting of consumption, investment, government spending, and net exports.
Marginal Propensity to Consume (MPC) is defined as:
- A. The ratio of total consumption to total income
- B. The change in consumption divided by the change in income
- C. The total amount spent on consumption in an economy
- D. The percentage of income saved by households
Answer: B. The change in consumption divided by the change in income
MPC is calculated as the change in consumption (ΔC) divided by the change in income (ΔY), showing how much additional consumption results from an additional unit of income.
MPC is calculated as the change in consumption (ΔC) divided by the change in income (ΔY), showing how much additional consumption results from an additional unit of income.
If MPC is 0.8, what is the value of the investment multiplier?
- A. 0.8
- B. 5
- C. 1.25
- D. 0.2
Answer: B. 5
Since MPS = 1 - MPC = 1 - 0.8 = 0.2, the multiplier k = 1/MPS = 1/0.2 = 5. This means an initial investment of ₹100 would increase national income by ₹500.
Since MPS = 1 - MPC = 1 - 0.8 = 0.2, the multiplier k = 1/MPS = 1/0.2 = 5. This means an initial investment of ₹100 would increase national income by ₹500.
If the consumption function is C = 50 + 0.75Y and investment is ₹100 crore, find the equilibrium national income (assuming a closed economy with no government).
- A. ₹600 crore
- B. ₹400 crore
- C. ₹800 crore
- D. ₹1000 crore
Answer: A. ₹600 crore
At equilibrium, Y = C + I = 50 + 0.75Y + 100. Solving: 0.25Y = 150, so Y = 600 crore. This represents the income level where aggregate demand equals national income.
At equilibrium, Y = C + I = 50 + 0.75Y + 100. Solving: 0.25Y = 150, so Y = 600 crore. This represents the income level where aggregate demand equals national income.
In an economy with deficient demand, why does the government prefer increasing expenditure over reducing taxes?
- A. Because reducing taxes increases inflation
- B. Because increased government spending has a direct and immediate impact on aggregate demand
- C. Because taxes are always ineffective in stimulating demand
- D. Because governments never have the authority to reduce taxes
Answer: B. Because increased government spending has a direct and immediate impact on aggregate demand
Government expenditure directly increases AD as it is a component of aggregate demand, while tax cuts may not be fully spent due to savings (based on MPC), making direct spending more effective.
Government expenditure directly increases AD as it is a component of aggregate demand, while tax cuts may not be fully spent due to savings (based on MPC), making direct spending more effective.