## Economics Class 12 Chapter 4 questions and answers: Determination of Income and Employment ncert solutions

Textbook | NCERT |

Class | Class 12 |

Subject | Economics |

Chapter | Chapter 4 |

Chapter Name | Determination of Income and Employment class 12 ncert solutions |

Category | Ncert Solutions |

Medium | English |

Are you looking for Ncert Solutions for Class 12 Macro Economics Chapter 4 Determination of Income and Employment? Now you can download economics class 12 chapter 4 questions and answers pdf from here.

### Question 1:** **What is marginal propensity to consume? How is it related to marginal propensity to save?

**Answer 1:** **Marginal Propensity to Consume (MPC)** refers to the proportion of additional income that a person or household spends on consumption rather than saving. Essentially, it measures how much consumption changes when income changes by a certain amount. The MPC is a value between 0 and 1, indicating the fraction of each additional dollar of income that is used for consumption.

For example, if a person receives an additional $100 in income and spends $80 of it on consumption, the MPC would be 0.8.

Mathematically, it is expressed as: MPC = \(\frac{\Delta C}{\Delta Y}\)

Where:

- \( \Delta C \) is the change in consumption,
- \( \Delta Y \) is the change in income.

**Marginal Propensity to Save (MPS)**, on the other hand, refers to the proportion of additional income that is saved rather than consumed. It measures how much saving changes when income changes by a certain amount. Like MPC, the MPS also lies between 0 and 1, representing the fraction of additional income that is saved.

Mathematically, it is expressed as: MPS = \(\frac{\Delta S}{\Delta Y}\)

Where:

- \( \Delta S \) is the change in saving,
- \( \Delta Y \) is the change in income.

**Relationship Between MPC and MPS:**

The key relationship between the two is that they are complementary, meaning:

MPC + MPS = 1

This relationship indicates that any additional income must either be consumed or saved. For example, if the MPC is 0.8, the MPS must be 0.2. Thus, the more a person consumes out of additional income, the less they save, and vice versa.

**MPC**measures the portion of additional income spent on consumption.**MPS**measures the portion of additional income saved.- Together, they sum to 1, as all additional income is either consumed or saved.

### Question 2:** **What is the difference between ex ante investment and ex post investment?

**Answer 2:** Here is a table summarizing the differences between **Ex Ante Investment** and **Ex Post Investment**:

Ex Ante Investment | Ex Post Investment |
---|---|

Meaning: Planned or intended investment in an economy before it actually happens. | Meaning: Actual investment made after the economic period is complete. |

Time Perspective: Forward-looking (based on expectations and intentions). | Time Perspective: Backward-looking (based on actual outcomes). |

Basis: Based on forecasts, plans, or business intentions. | Basis: Based on actual data and real economic activity. |

Uncertainty: Involves uncertainty and is dependent on future conditions. | Uncertainty: No uncertainty, as it reflects realized outcomes. |

Influence: Influenced by expected profitability, economic outlook, and policy incentives. | Influence: Affected by actual demand, economic conditions, and shocks. |

Data Availability: Available before the period begins, often through surveys or reports. | Data Availability: Available after the period ends, based on recorded data. |

Example: A firm planning to invest $1 million in new machinery next year. | Example: A firm actually investing $800,000 in new machinery after the year ends. |

### Question 3:** **What do you understand by ‘parametric shift of a line’? How does a line shift when its (i) slope decreases, and (ii) its intercept increases?

**Answer 3:** Considering the equation of a straight line as

b = ma + ε

Where m = slope of straight line, m > 0

ε = intercept on vertical axis, ε> 0

Also, when a increases by 1 unit, the value of b increases by m units.

The parameters εand m are parameters of a graph.

As the value of m increases, the straight line rotates upward around the same vertical intercept. This movement is an example of parametric shift of the graph.

According to the conditions in question

i. If the slope decreases, then the consumption curve will shift downwards

ii. When the intercept increases, the consumption curve will move parallelly with the intercept.

### Question 4:** **What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?

**Answer 4:** Effective demand is the demand for a product or service when purchasers become constrained in a market. It also refers to their ability and willingness to purchase goods at different levels. According to the macroeconomic theory by Keynes, effective demand is referred to as the point of equilibrium where aggregate demand equals aggregate supply.

Graphically it can be represented as :

In this graph, the x-axis represents income, and the y-axis represents the level of aggregate demand. The two curves, AD and AS, meet at equilibrium point E. Effective demand is shown by EG. AD represents the output level. The autonomous expenditure multiplier can be derived as follows

Y = AD (at equilibrium)

AD = A + cY

Therefore

Y = A + cY

or A = Y – cY

A = Y (1 – c)

Y = A / (1 – c)

Where

A = Autonomous expenditure

c = MPC or Marginal Propensity to Consume

Y = Level of income

1 / 1-c = autonomous expenditure multiplier

Therefore we can say that the autonomous expenditure multiplier is dependent on the MPC and Income level.

### Question 5:** **Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4000 crores. State whether the economy is in equilibrium or not (cite reasons).

**Answer 5:** Consumption expenditure (A) = Rs 50 Crores

MPS = 0.2

So, MPC = 1 − MPS

= 1 − 0.2

= 0.8

Y = 4000 Crores

We know that AD = A + cY …………..(1)

Putting the values in equation (1)

AD = 50 + 0.8 × 4000

= 50 + 3200

= Rs 3250 Crores

But, Rs 3250 < Rs 4000

Implies that AD < Y

Consequently, since the level of output is not equal to the level of income, the economy is not in equilibrium.

### Question 6:** **Explain ‘Paradox of Thrift’.

**Answer 6:** The **Paradox of Thrift** is a concept in Keynesian economics that highlights a counterintuitive situation where increased saving by individuals, while seemingly beneficial for personal financial security, can lead to a negative outcome for the overall economy. According to the paradox, when many individuals in an economy simultaneously decide to save more and spend less, aggregate demand falls because consumption is a major component of demand.

As a result, businesses experience lower sales, which leads to reduced production, layoffs, and lower incomes. Ironically, as incomes decline, the total amount of savings in the economy may actually decrease, despite individuals’ intentions to save more. This paradox illustrates the potential dangers of widespread saving during economic downturns, as it can deepen recessions by further reducing demand and slowing economic recovery.