Explain determination of equilibrium level of income using ‘Consumption plus Investment’ approach. Use diagram. OR Explain, with the help of a diagram, how equilibrium level of income is determined considering aggregate demand and aggregate supply.

The economy is said to be in equilibrium when Aggregate Demand (consisting of consumption and investment expenditures) is equal to the Aggregate Supply (consisting of total output). AD is represented by the (C + I) curve while AS is represented by the 45 degree line (or the C + S curve) in the analysis. Consumption expenditure varies directly with income while investment expenditure is independent of income. The intersection or equality of AD and AS gives us the equilibrium. The equilibrium situation is a situation of effective demand because AD is equal to AS. Here, E is the point of equilibrium where AD is equal to AS. OY is the equilibrium level of output. When AD is less than AS: When AD is less than AS, the (C + I) curve lies below AS curve. Consumers and firms are willing to purchase less goods than firms are willing to produce. As a result, planned inventory rises above desired level. Firms decrease employment and output to bring economy back to point E. When AD is greater than AS: When AD is greater than AS, the (C + I) curve lies above AS curve. Consumers and firms are willing to purchase more goods than firms are willing to produce. As a result, planned inventory falls below desired level. Firms increase employment and output to bring economy back to point E.

HARD

Earn 100

Calculate ‘Investment’ from the following:

(i) Equilibrium Income Rs $500$

(ii) Consumption expenditure at zero income Rs $50$

(iii) Marginal propensity to consume $0.7$

Important Questions on Determination of Income and Employment

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

In an economy,

C = 300 + 0.8 Y

and

I = 500

(where C = Consumption, Y = Income, I = Investment). Calculate the following: (a) Equilibrium level of income; (b) Consumption expenditure at equilibrium level of income.

EASY

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Find autonomous consumption expenditure, if at equilibrium, National Income is Rs

1500

crores; investment expenditure is Rs

300

crores; Marginal Propensity to Consume is

0.7

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

_____ supply is the money value of total supply of goods and services available for _____ by an economy.

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Calculate aggregate demand (AD), aggregate supply (AS) for all levels and the equilibrium level of income from the given schedule, if the investment is fixed at Rs $20$ crores:

Income	0	10	20	30	40	50	60	70	80	90	100
Consumption	20	25	30	35	40	45	50	55	60	65	70

MEDIUM

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Explain the determination of equilibrium level of income by : Aggregate demand and aggregate supply approach.

MEDIUM

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

If at equilibrium level, National Income is Rs

2, 000

crores, Autonomous Consumption is Rs

400

crores and Investment expenditure is Rs

200

crores, then Marginal Propensity to Consume will be:

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

The consumption function of an economy is given as:

C = 200 + 0.75 Y

, If planned investments are Rs

500

crores, calculate equilibrium level of national income.

EASY

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

_____ refers to actual savings in an economy during a year.

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

"Ex-Ante Savings and Ex-Ante Investments are always equal.” Defend or refute the given statement with valid reasons.

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Voluntary _____ is that part of the working force not willing to engage itself in gainful _____.

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Find consumption expenditure from the following: Autonomous consumption = Rs

100

; Marginal propensity to consume =

0.70

; National Income = Rs

1, 000

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Explain determination of equilibrium level of income using ‘Consumption plus Investment’ approach. Use diagram.

Explain, with the help of a diagram, how equilibrium level of income is determined considering aggregate demand and aggregate supply.

MEDIUM

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

If MPS =

0.30

, Autonomous Consumption = Rs

50

crores and Investment = Rs

100

crores, then Equilibrium Income will be:

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Calculate AD, AS for every level of income and the equilibrium level, from the following schedule: (assuming that the investment is fixed at Rs $40$ crores)

Income	100	200	300	400	500	600
Consumption	120	200	280	360	440	520

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

The sum of marginal propensity _____ and marginal propensity _____ is always equal to one.

MEDIUM

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

What will be the level of ex-ante aggregate demand when autonomous investment and consumption expenditure is Rs

100

Crore and MPS is

0.4

and level of income is Rs

4, 000

crore.

EASY

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Under the Keynesian framework, income is measured along the _____(horizontal/vertical) line.

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Cash reserve ratio is the share of a bank's total _____ to be maintained as _____ in the form of liquid cash as per the guidelines of RBI.

EASY

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

If C = 20 + 0.80Y and Investment Expenditure is Rs 50 crores, then Equilibrium Income is:

HARD

Economics>Macroeconomics>Determination of Income and Employment>Determination of Equilibrium Income

Explain determination of equilibrium level of national income using aggregate demand and aggregate supply approach. Use diagram. Also explain the effect when aggregate demand is less than aggregate supply.

(i) Equilibrium Income	Rs $500$
(ii) Consumption expenditure at zero income	Rs $50$
(iii) Marginal propensity to consume	$0.7$

Calculate ‘Investment’ from the following: (i) Equilibrium Income Rs 500 (ii) Consumption expenditure at zero income Rs 50 (iii) Marginal propensity to consume 0.7

Important Questions on Determination of Income and Employment

Learn and Prepare for any exam you want !

Calculate ‘Investment’ from the following:

(i) Equilibrium Income Rs $500$

(ii) Consumption expenditure at zero income Rs $50$

(iii) Marginal propensity to consume $0.7$