In the Keynesian framework, the Employment Level is determined by the equilibrium level of output. During the first stage of macroeconomic analysis, the General Price Level is assumed to remain fixed. Aggregate Demand determines the equilibrium level of income through the interaction of consumption and investment. National Income is the sum of all aggregate factor payments made to the factors of production. Therefore, the correct matching is 1-d, 2-b, 3-c, 4-a, making Option B the correct answer.

The Assertion is false because macroeconomic models do not account for all variables changing simultaneously. Instead, they simplify analysis by holding other relevant variables constant. The Reason is true because economists use the ceteris paribus assumption precisely because it is impossible to analyse every variable at the same time. Therefore, Option B is correct.

The ceteris paribus assumption is described in NCERT as a stylisation typical of almost any theoretical exercise. Since analysing all economic variables simultaneously is difficult, economists simplify reality by assuming that all other relevant factors remain unchanged while examining the effect of one variable. Thus, Option C is correct.

When solving two simultaneous equations, the standard mathematical approach is to express one variable in terms of the other from one equation. This expression is then substituted into the second equation to determine the remaining variable. In macroeconomic modelling, this analytical process reflects the logic of simplifying complex relationships while focusing on one variable at a time. Therefore, Option D is correct.

According to John Maynard Keynes, the equilibrium level of output and employment is determined by aggregate demand. This idea is known as the Principle of Effective Demand, which forms the foundation of Keynesian macroeconomics. In the short run, Keynes assumed that prices remain fixed, allowing output to adjust in response to changes in demand. Therefore, Statements 1 and 2 are correct, while Statement 3 is incorrect, making Option D the correct answer.

The Keynesian analysis of macroeconomic equilibrium proceeds in a logical sequence. First, equilibrium is determined assuming a fixed price level. In the next stage, the price level is allowed to vary to examine how changes in prices affect the economy. Finally, macroeconomic equilibrium is reanalysed under the variable price assumption. Hence, the correct order is 1 → 2 → 3, making Option A the correct answer.

In the first stage of the Keynesian macroeconomic model, the economy is assumed to have unused resources, such as unemployed labour and idle production capacity. Since firms can increase production without facing higher marginal costs or the law of diminishing returns, they respond to higher demand by increasing output rather than raising prices. Therefore, the price level is assumed to remain fixed, making Option C the correct answer.

In the basic two-sector Keynesian model, planned (ex ante) investment is assumed to be autonomous, meaning it does not vary with current income or interest rate. It is represented by the equation: I = Ī where Ī denotes a constant level of planned investment. This simplifying assumption helps analyse national income determination more easily. Hence, Option B is correct.

Ex ante investment refers to the amount a producer plans to invest before actual economic events occur. In this case, the producer intends to increase inventory by Rs 100. Since the question asks for the planned investment, unexpected future events are irrelevant. Therefore, the ex ante investment is Rs 100, making Option D correct.

The producer initially planned to increase inventory by Rs 100. However, due to an unforeseen increase in demand, goods worth Rs 30 had to be sold from the planned stock. Therefore, the actual (ex post) inventory investment becomes: Rs 100 − Rs 30 = Rs 70 Ex post investment measures what actually occurs after all economic transactions have taken place. Hence, Option A is the correct answer.

In national income accounting, the aggregate value of final goods and services produced is equal to the sum of factor payments (such as wages, rent, interest, and profit) because every payment received by factors of production arises from the production of final goods and services. In the simplified Keynesian framework used in this chapter, this aggregate value is referred to as Gross Domestic Product (GDP). Therefore, Option A is the correct answer.

The chapter analyses a simplified economy without a government sector, where indirect taxes and subsidies are ignored. Under this assumption, the distinction between GDP at market prices and National Income (factor cost) disappears. Therefore, GDP is treated as identically equal to National Income throughout the analysis, making Option C correct.

The Keynesian consumption function is written as: C = C̄ + cY where: C̄ = Autonomous Consumption (consumption when income is zero) c = Marginal Propensity to Consume (MPC) Comparing the given equation, C = 100 + 0.8Y we obtain: Autonomous Consumption (C̄) = 100 MPC (c) = 0.8 Hence, Option B is the correct answer.

Machines produced during a given year are classified as final goods because they are purchased for long-term productive use rather than for immediate resale or further processing. They form part of gross capital formation (investment) and contribute directly to GDP. Unlike intermediate goods, machines provide services over many years in the production process. Therefore, Option C is correct.

According to the Keynesian theory, when aggregate demand is insufficient, firms are unable to sell all the goods they can potentially produce. Consequently, they reduce production and employ fewer factors of production, leading to equilibrium output below the full employment level. Thus, the Assertion is true, and the Reason correctly explains the Assertion, making Option D the correct answer.

When the economy reaches full employment, all available resources are already fully utilized. If aggregate demand continues to increase, firms cannot significantly expand production. Instead, the excess demand results in competition for limited goods and services, causing the general price level to rise. Therefore, excess demand leads to inflation in the long run, making Option A correct.

The simplified two-sector Keynesian model ignores government taxes and subsidies, allowing GDP to be treated as National Income. Furthermore, the notation Ā represents total autonomous expenditure, which is the sum of expenditure components that do not depend on income (such as autonomous consumption and autonomous investment). Therefore, both Statements 1 and 2 are correct, making Option C the correct answer.

In the simple two-sector Keynesian model: Price level is assumed to remain constant during the first stage of analysis. Autonomous Investment (Ī) is treated as a constant positive value independent of income. Government expenditure is ignored because the model consists only of households and firms. The Aggregate Supply Curve is represented by the 45-degree line, where output equals income. Therefore, the correct matching is: 1 → c 2 → d 3 → a 4 → b Hence, Option D is correct.

In the Keynesian income determination diagram, the 45-degree line represents all points where Aggregate Supply (AS) equals output (Y). Under the fixed-price assumption, producers are willing to supply whatever amount of output is demanded at the prevailing price level. Therefore, every point on the 45-degree line satisfies Output = Income, making it the Aggregate Supply schedule. Hence, Option A is correct.

The correct sequence for deriving equilibrium output in the two-sector Keynesian model is: 1. Define Aggregate Demand AD = C + I 2. State the equilibrium condition Y = AD 3. Substitute the equations Y = C̄ + Ī + cY 4. Rearrange Y − cY = C̄ + Ī Thus, the correct logical order is 3 → 1 → 2 → 4, making Option B the correct answer.