Macroeconomics: Determination of Income and Employment

Topics in this chapter

• Aggregate Demand and Expenditure
• Consumption and Saving Functions
• Equilibrium Income Determination
• Investment Multiplier and Paradox
• Employment and Underemployment Equilibrium
• Inflationary and Deflationary Gaps

Cheat sheet

Practice questions

1. Question 1Q-FB4036

   In a two-sector economy, equilibrium level of income is determined at the level where:

   1. A.Consumption is equal to saving
   2. B.Planned aggregate demand is equal to planned output
   3. C.Investment is equal to consumption
   4. D.Saving is equal to income
   See the answer and solution
2. Question 2Q-EF94AA

   The marginal propensity to consume in an economy is 0.75. If autonomous investment increases by ₹200 crore, the equilibrium income will increase by:

   1. A.₹150 crore
   2. B.₹200 crore
   3. C.₹600 crore
   4. D.₹800 crore
   See the answer and solution
3. Question 3Q-F88C54

   Which combination of measures is most appropriate for correcting deficient demand in an economy?

   1. A.Increase government expenditure and reduce the income tax rate
   2. B.Reduce government expenditure and increase the income tax rate
   3. C.Increase the bank rate and sell government securities
   4. D.Increase the cash reserve ratio and reduce government expenditure
   See the answer and solution
4. Question 4Q-5D54E9

   Explain how an increase in autonomous investment leads to a multiplied increase in equilibrium income.

   See the answer and solution
5. Question 5Q-E8A66E

   The consumption function of an economy is C = ₹100 crore + 0.8Y. At what level of income will saving be zero?

   1. A.₹100 crore
   2. B.₹400 crore
   3. C.₹500 crore
   4. D.₹800 crore
   See the answer and solution