NCERT Solutions for Class 12 Economics Chapter 4 Determination of Income and Employment

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 4 Determination of Income and Employment were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Determination of Income and Employment NCERT Solutions for Class 12 Economics Chapter 4

Determination of Income and Employment Questions and Answers Class 12 Economics Chapter 4

Question 1.
What is marginal propensity to consume? How is it related to marginal propensity to save? (C.B.S.E. 2011 Comp.)
Marginal Propensity to Consume (MPC) is the ratio of change in consumption due to the change in ‘ income. It is the rate of in umption due to a unit increment in income.
$$M P C=\frac{\Delta C}{\Delta Y}$$

Marginal Propensity to Save (MPS) is the ratio of change in saving due to the change in income. It is the rate of increase in ex-ante saving due to a unit increment in income.
$$\mathrm{MPS}=\frac{\Delta \mathrm{S}}{\Delta Y}$$

Question 2.
What is the difference between ex-ante investment and ex-post investment?
Following are the points of difference between ex-ante investment and ex-post investment:

 S. No. Ex-ante Investment Ex-post Investment 1. Ex-ante investment refers to the investment which is planned to be made by the firms during a period of one year. Ex-post investment refers to the investment which is actually realised by the firms during aperiod of one year. 2. Ex-ante investment is also known as planned investment. Ex-post investment is also known as realised or actual investment.

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 increase?
Parametric shift means a shift in the straight line curve due to a change in the value of a parameter. As the value of the parameter changes, the straight line curve rotates upward or downward along the same vertical intercept .
(i) When the slope of a line decreases, the line rotates downwards along the same-vertical intercept. It can be shown with the help of a diagram.

In the diagram, the original line is represented by an equation: b = a + 2. The slope is I. As the slope decreases from I to 0.5, the line shifts downwards to b = 0.5a + 2.

(ii) When the intercept of a line increases, there is a parallel shift in the line. It can be shown with the help of a diagram

In the diagram, the original line is represented by an equation: b = 0.5a + 2. The intercept is 2. As the intercept increases from 2 to 3, the line shifts upwards to b = 0.5a + 3.

Question 4.
What is ‘effective demand’? How will you drive the autonomous expenditure multiplier when price of final goods and the ratio of interest are given?
Effective demand refers to the Aggregate Demand, which is equal to the Aggregate Supply under the conditions of fixed price of final goods and constant rate of interest in the economy. The supply of final goods is assumed to be infinitely elastic at constant price over short period of time.

Autonomous expenditure multiplier is the ratio of change in aggregate output or income to a change in autonomous spending. That is, $$\text { Autonomous Expenditure Multiplier }=\frac{\text { Change in Aggregate Output }}{\text { Change in Autonomous Spending }}$$ An increase or decrease in autonomous spending causes more than proportionate increase in the aggregate output of final goods through the multiplier process.

Question 5.
Measure the level of ex-ante Aggregate Demand when autonomous investment and consumption expenditure (A) is ₹ 50 crore, and MPS is 0.2 and level of income (Y) is ₹ 4000 crores. State whether the economy is in equilibrium or not (cite reasons).
Level of income (Y) = ₹ 4,000 crores
Autonomous expenditure $$\overline{\mathrm{A}}$$ = ₹ 50 crores
Marginal Propensity to Save (MPS) = 0.2
Hence, Marginal Propensity to Consume (MPC = c) = 1 – MPS = 1 – 0.2 = 0.8
Ex-ante Aggregate Demand = $$\overline{\mathrm{A}}$$ + cY
Substituting the appropriate values; we get
Ex-ante Aggregate Demand
= 50 + (0.8 x 4000)
= 50 + 3200
= 3250
Thus, the level of ex-ante Aggregate Demand is ₹ 3,250 crores.
Since the ex-ante Aggregate Demand is less than the level of income (output), there is an excess supply in the economy. Thus, ₹ 4,000 crores is not the equilibrium level of income in the economy.

Question 6.