NCERT Solutions for Class 12 Economics Introductory Macroeconomics Chapter 4

Income Determination Class 12

Exercise : Solutions of Questions on Page Number : 59

Q1 :

What is marginal propensity to consume? How is it related to marginal propensity to save?

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

Then MPC  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.

Q2 :

What is the difference between ex ante investment and ex post investment?

 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.

Q3 :

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?

Q4 :

What is 'effective demand'? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?

Q5 :

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).