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NCERT Book Solutions (Class - 6 to Class - 12)
Class - 12 : Macro Ecornomics
MacroEconomics : Chapter - 4
Page No 59:
Question : 1:
What is
marginal propensity to consume? How is it related to marginal
propensity to save?
Answer :
Marginal
propensity to consume refers to the ratio of change in the consumer’s
expenditure due to the change in disposable income (income after
deducting taxes). In other words, MPC measures how consumption will
vary with the change in income.
So,
MPC
Where,
ΔC = Change in consumption
ΔY = Change in income
For
example, if income increases from Rs 200 crores to Rs 250 crores and
consumption increases from Rs 20 crores to Rs 40 crores, it implies
that 0.4 is the MPC or 40% increase in the income is being consumed.
This can
further be explained with the help of a table and a diagram.
If income
and consumption are:
Income in Rs (Y) |
Consumption Expenditure in Rs (C) |
200 |
20 |
250 |
40 |
Also, MPC can be explained with the given diagram.
In the
diagram, x-axis represents national income and y-axis
represents consumption level.
So, MPC
The relationship between MPC and MPS can be explained as −
Y = C + S (Assuming that the income earned is either
consumed or saved)
Or, ΔY = ΔC + ΔS
Dividing
both sides by ΔY
Or, 1 = MPC + MPS
Or, MPC =
1 − MPS
Or, MPS =
1 − MPC
So, the
sum of MPC and MPS is always equal to unity.
Question : 2:
What is
the difference between ex ante investment and ex post investment?
Answer :
S. No. |
Ex-ante Investment |
Ex-post Investment |
1. |
It refers to the planned or intended investment during a particular period of time. | It refers to the actual level of investment during a particular period of time. |
2. |
It is imaginary (intended), in which a firm assumes the level of investment on its own. | It is factual or original that signifies the existing investment of a particular time. |
3. |
It is planned on the basis of future expectations. | It is the actual result of variables. |
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 :
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.
(i) A straight line rotates downward around the same vertical
intercept as its slope decreases.
(ii) A
straight line shifts parallelly upward when its intercept increases.
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 :
Effective
demand refers to a situation in which equilibrium output is
determined solely by the level of aggregate demand. This is because
of the assumption that the supply is infinitely elastic and if there
exists any inequality between the Aggregate Demand (AD) and the
Aggregate Supply (AS), then the equilibrium output will only be
influenced by AD. The concept of effective demand can be explained
with the help of the given diagram.
The x-axis
represents income/output level and y-axis represents the level
of aggregate demand. E is the equilibrium point where the two curves
AS and AD meet. EG is the effective demand and output level is
determined by AD (assuming the elasticity of supply to be perfectly
elastic).
Autonomous
expenditure multiplier is derived as
Y = AD (at equilibrium)
Y = A + cY [Where AD = A + cY]
Y − cY = A
Y (1 − c) = A
So, the
autonomous expenditure multiplier is dependent on the income and MPC.
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 :
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
Hence, the
economy is not in equilibrium.
Question : 6:
Explain
‘Paradox of Thrift’.
Answer :
Paradox of
thrift refers to a situation in which people tend to save more money,
thereby leading to a fall in the savings of the economy as a whole.
In other words, when everyone increases his/her saving-income
proportion i.e. MPS (s), then, the aggregate demand will fall as
consumption decreases. This will further lead to a decrease in
employment and income level and finally this will reduce the total
savings for the economy. This concept was suggested by Keynes wherein
increased saving at individual levels will gradually lead to the
slowdown of economy in terms of circular flow of income.
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