CUET UG Economics Booster Test 3 - Investment and Aggregate Demand -

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CUET UG Economics Booster Test 3 - Investment and Aggregate Demand

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Investment and Aggregate Demand

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QUESTION 1 OF 20

In macroeconomics, investment defined as an addition to the stock of physical capital adds directly to the future __________ of the economy.

Answer Review

1 In macroeconomics, investment defined as an addition to the stock of physical capital adds directly to the future __________ of the economy.

A Autonomous consumption level

B Tax revenue capacity

C Productive capacity

D Marginal propensity to save

💡 Short Explanation

Investment increases the stock of physical capital. More capital enables greater production in the future. Hence, investment increases the economy's productive capacity.

✅ Correct Answer Explanation

Macroeconomic investment refers to additions to physical capital such as machines, factories, roads, and buildings. These capital goods improve the economy's ability to produce goods and services in future periods. Therefore, investment directly increases the productive capacity of the economy. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because investment does not directly increase autonomous consumption.
Option B) Incorrect because higher tax revenue may be an indirect consequence, not the direct objective of investment.
Option D) Incorrect because investment does not directly determine the marginal propensity to save.

🎯 Strategy

Used

Concept Identification

Application:

Recall the primary objective of capital formation in macroeconomics.

Final Logic:

Investment builds capital stock, thereby increasing the productive capacity of the economy. Therefore, Option C is correct.

🧠 Memory Trick

"Investment Today → Production Tomorrow."

📚 Chapter: Determination of Income and Employment

2 Which of the following statements rigorously define the nature of inventory changes in an economy?
Statements:
1. Change in inventory is exclusively considered a planned financial asset.
2. It refers to the part of output produced which is not sold and remains with the firm.
3. Inventory investment can only take positive values.
4. It can be categorized into planned and unplanned inventory investment.

A 1, 2 and 3

B 1 and 3 only

C 3 and 4 only

D 2 and 4 only

💡 Short Explanation

Inventories consist of unsold output. Inventory investment may be planned or unplanned. It may be positive or negative.

✅ Correct Answer Explanation

Evaluate each statement: Statement 1: Incorrect. Inventory is a real asset, not exclusively a planned financial asset. Statement 2: Correct. Inventory consists of output produced but not sold. Statement 3: Incorrect. Inventory investment can be positive (accumulation) or negative (depletion). Statement 4: Correct. Inventory investment is classified into planned and unplanned inventory investment. Thus, only Statements 2 and 4 are correct. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Statements 1 and 3 are false.
Option B) Incorrect because both statements included are incorrect.
Option C) Incorrect because Statement 3 is false.

🎯 Strategy

Used

Statement Elimination

Application:

Evaluate each statement based on the NCERT explanation of inventory investment.

Final Logic:

Only Statements 2 and 4 correctly describe inventory changes.

🧠 Memory Trick

"Inventory = Unsold Goods; Planned or Unplanned."

📚 Chapter: Determination of Income and Employment

3 Arrange the logical sequence establishing fixed capital as a final good rather than an intermediate good.
Statements:
1. It provides productive services over multiple years.
2. A machine is produced and purchased by a firm.
3. It is not completely used up in a single production cycle.
4. Therefore, it is classified as a final investment good.

A 2, 3, 1, 4

B 1, 2, 4, 3

C 3, 1, 4, 2

D 2, 1, 3, 4

💡 Short Explanation

A machine is first produced and purchased. It is not exhausted in one production cycle. It continues providing services over many years. Therefore, it is treated as a final investment good.

✅ Correct Answer Explanation

The logical order is: 1. A machine is produced and purchased by a firm. 2. It is not completely used up in one production cycle. 3. It provides productive services over many years. 4. Hence, it is classified as a final investment good. Thus, the correct sequence is: 2 → 3 → 1 → 4 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because productive services can only be discussed after the machine exists.
Option C) Incorrect because classification comes after establishing its characteristics.
Option D) Incorrect because the machine must first be shown to survive multiple production cycles before classification.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the reasoning used by NCERT to classify fixed capital goods.

Final Logic:

Purchase → Not Used Up → Multi-year Service → Final Good, making Option A correct.

🧠 Memory Trick

"Machine → Durable → Long Service → Final Good."

📚 Chapter: Determination of Income and Employment

4 A firm opens the year with an existing inventory worth Rs. 500. It produces Rs. 2000 worth of goods and plans to sell Rs. 1800. Actual sales are Rs. 1950. What is the final actual ex post inventory at the end of the year?

A Rs. 700

B Rs. 550

C Rs. 150

D Rs. 450

💡 Short Explanation

Opening inventory is added to current production to obtain total goods available. Actual sales are deducted from total goods available. The remaining stock is the closing (ex post) inventory.

✅ Correct Answer Explanation

Total goods available: =Opening Inventory+Production=500+2000=2500 Actual sales: =1950 Therefore, Closing Inventory=2500-1950=550 Hence, the firm's actual (ex post) inventory at the end of the year is Rs. 550. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it underestimates actual sales.
Option C) Incorrect because it ignores the opening inventory.
Option D) Incorrect because the inventory calculation is incomplete.

🎯 Strategy

Used

Application-Based Calculation

Application:

Calculate total goods available and subtract actual sales.

Final Logic:

500+2000-1950=550
Hence, Option B is correct.

🧠 Memory Trick

"Opening Stock + Production − Sales = Closing Stock."

📚 Chapter: Determination of Income and Employment

5 Match the investment conditions with their graphical interpretations.

List I	List II
1. Investment is constant at Ī	a. Upward sloping investment curve
2. Investment rises with income	b. Horizontal curve lies exactly on the X-axis
3. Change in autonomous investment (ΔI)	c. Horizontal line at a height Ī above the X-axis
4. Investment is zero	d. Parallel upward/downward shift of the horizontal line

A 1-d, 2-c, 3-b, 4-a

B 1-b, 2-a, 3-c, 4-d

C 1-c, 2-a, 3-d, 4-b

D 1-a, 2-d, 3-b, 4-c

💡 Short Explanation

Constant investment is represented by a horizontal line. Income-dependent investment slopes upward. A change in autonomous investment shifts the entire line. Zero investment coincides with the X-axis.

✅ Correct Answer Explanation

The correct matching is: 1. Investment is constant at Ī → c. Horizontal line at a height Ī above the X-axis 2. Investment rises with income → a. Upward sloping investment curve 3. Change in autonomous investment (ΔI) → d. Parallel upward/downward shift of the horizontal line 4. Investment is zero → b. Horizontal curve lies exactly on the X-axis Thus, the correct sequence is: 1-c, 2-a, 3-d, 4-b Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because constant investment is represented by a horizontal line, not a shift.
Option B) Incorrect because a change in autonomous investment causes a parallel shift, not a horizontal line at Ī.
Option D) Incorrect because constant investment is not represented by an upward-sloping curve.

🎯 Strategy

Used

Option Grouping

Application:

Match each investment condition with its graphical representation.

Final Logic:

Only Option C correctly matches all four conditions.

🧠 Memory Trick

"Constant–Horizontal, Rising–Slope, Change–Shift, Zero–Axis."

📚 Chapter: Determination of Income and Employment

6 When we refer to investment as 'exogenous' in the simplified income determination model, it fundamentally means that:

A Its value is determined outside the model and is independent of the current income level.

B Its value strictly depends on the domestic consumption function.

C It is heavily influenced by the government's direct taxation policy.

D It is an induced variable that changes when National Income changes.

💡 Short Explanation

Exogenous variables are determined outside the model. Autonomous investment is assumed to be fixed. It does not vary with current income.

✅ Correct Answer Explanation

In the simple Keynesian income determination model, investment is assumed to be autonomous (exogenous). This means: Its value is determined outside the model. It is treated as a fixed positive constant (Ī). It is independent of current national income. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because autonomous investment does not depend on the consumption function.
Option C) Incorrect because taxation is ignored in the basic two-sector model.
Option D) Incorrect because exogenous investment is not an induced variable.

🎯 Strategy

Used

Concept Identification

Application:

Recall the definition of an exogenous variable in the Keynesian model.

Final Logic:

Investment is determined outside the model and remains independent of income, making Option A correct.

🧠 Memory Trick

"Exogenous = External = Fixed."

📚 Chapter: Determination of Income and Employment

7 Evaluate the following statements regarding the cost of investible funds.
Statements:
1. The interest rate represents the cost of investible funds.
2. A decrease in interest rates typically discourages investment.
3. At higher interest rates, the opportunity cost of investing increases.
4. Credit availability and cost of funds both simultaneously influence investment decisions.

A 1, 2 and 4

B 2 and 3 only

C 1 and 2 only

D 1, 3 and 4

💡 Short Explanation

Interest rate is the cost of borrowing funds. Higher interest rates discourage investment. Credit availability and borrowing cost jointly affect investment decisions.

✅ Correct Answer Explanation

Evaluate each statement: Statement 1: Correct. Interest rate is the cost of investible funds. Statement 2: Incorrect. A decrease in interest rates generally encourages, not discourages, investment. Statement 3: Correct. Higher interest rates increase the cost (opportunity cost) of investment. Statement 4: Correct. Investment decisions depend on both credit availability and cost of borrowing. Therefore, the correct combination is 1, 3 and 4. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Statement 2 is false.
Option B) Incorrect because Statement 2 is false and Statement 1 is omitted.
Option C) Incorrect because Statement 2 is incorrect and Statement 3 is omitted.

🎯 Strategy

Used

Statement Elimination

Application:

Evaluate each statement using the determinants of investment discussed in the Keynesian model.

Final Logic:

Only Statements 1, 3 and 4 are correct, making Option D the correct answer.

🧠 Memory Trick

"Low Interest → More Investment; High Interest → Less Investment."

📚 Chapter: Determination of Income and Employment

8 Assertion (A): In the basic Keynesian model of income determination, we analyze the shifting of the investment curve based on changing interest rates.
Reason (R): For simplicity, the model assumes firms plan to invest the same amount every year, represented as an autonomous constant.

A Both false

B A false, R true

C Both true, R explains A

D A true, R false

💡 Short Explanation

The basic Keynesian model assumes autonomous investment. Investment is treated as a fixed constant. Therefore, changes in interest rates are not analysed in the simple model.

✅ Correct Answer Explanation

Assertion (A): False. In the simple Keynesian model, investment is assumed to be autonomous (Ī) and remains constant. The model does not analyse shifts in the investment curve due to changing interest rates. Reason (R): True. For simplicity, firms are assumed to invest the same fixed amount every year, represented by Ī. Thus, the Assertion is false while the Reason is true. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the Reason is true.
Option C) Incorrect because the Assertion is false.
Option D) Incorrect because the Assertion is not true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Determine the truth of both statements and whether the Reason explains the Assertion.

Final Logic:

The model assumes autonomous investment, so only the Reason is true.

🧠 Memory Trick

"Simple Keynes = Fixed Investment."

📚 Chapter: Determination of Income and Employment

9 In a closed economy with no government, if Savings (S) = -40 + 0.2Y and Equilibrium Income (Y) = 500, what is the value of autonomous investment (Ī)? (Assume S=Iat equilibrium.)

A 60

B 40

C 100

D 80

💡 Short Explanation

At equilibrium, Savings = Investment. First calculate savings using the savings function. The resulting value equals autonomous investment.

✅ Correct Answer Explanation

Given, S=-40+0.2Y Substitute Y=500S=-40+0.2(500)S=-40+100=60 Since S=I at equilibrium, I=60 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect due to incorrect substitution.
Option C) Incorrect because the autonomous saving term is ignored.
Option D) Incorrect because the savings function is not evaluated correctly.

🎯 Strategy

Used

Substitution

Application:

Calculate savings using the given equation and apply the equilibrium condition S=I.

Final Logic:

40+0.2(500)=60
Therefore, Option A is correct.

🧠 Memory Trick

"At Equilibrium: Saving = Investment."

📚 Chapter: Determination of Income and Employment

10 Arrange the steps mapping the flow of the two-sector macroeconomic equilibrium model algebraic derivation.
Statements:
1. Define Y=C+I.
2. Expand the equation to Y=C+cY+I.
3. Group autonomous terms: Y=A+cY.
4. Substitute A=C+I.

A 1, 4, 3, 2

B 2, 1, 4, 3

C 1, 2, 4, 3

D 4, 3, 2, 1

💡 Short Explanation

Start with the equilibrium condition. Substitute the consumption and investment functions. Combine autonomous terms. Rewrite the equation using autonomous expenditure.

✅ Correct Answer Explanation

The derivation proceeds as follows: 1. Begin with the equilibrium condition: Y=C+I 1. Substitute C=C+cY,I=I to obtain Y=C+cY+I 1. Combine autonomous components: A=C+I 1. Rewrite the equation as Y=A+cY Thus, the correct sequence is: 1 → 2 → 4 → 3 Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because autonomous expenditure cannot be substituted before expanding the equation.
Option B) Incorrect because the equilibrium equation must be stated first.
Option D) Incorrect because it starts with the final substitution instead of the equilibrium condition.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the algebraic derivation of the two-sector equilibrium equation.

Final Logic:

Equilibrium → Substitute → Combine → Rewrite, making Option C correct.

🧠 Memory Trick

"Y = C + I → Expand → Combine → Ā."

📚 Chapter: Determination of Income and Employment

11 Match the AD components and parameters with their exact economic definitions.

List I	List II
1. C̄	a. The rate of change of consumption as income changes
2. cY	b. Consumption independent of income
3. Ī	c. Exogenous addition to physical capital/inventory
4. c (MPC)	d. Consumption dependent on income

A 1-b, 2-c, 3-d, 4-a

B 1-a, 2-b, 3-c, 4-d

C 1-c, 2-d, 3-b, 4-a

D 1-b, 2-d, 3-c, 4-a

💡 Short Explanation

C̄ is autonomous consumption. cY represents induced consumption. Ī denotes autonomous investment. c is the Marginal Propensity to Consume (MPC).

✅ Correct Answer Explanation

The correct matching is: 1. C̄ → b. Consumption independent of income 2. cY → d. Consumption dependent on income 3. Ī → c. Exogenous addition to physical capital/inventory 4. c (MPC) → a. The rate of change of consumption as income changes Thus, the correct sequence is: 1-b, 2-d, 3-c, 4-a Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because induced consumption (cY) is not autonomous investment.
Option B) Incorrect because C̄ is not the MPC.
Option C) Incorrect because Ī is autonomous investment, not autonomous consumption.

🎯 Strategy

Used

Option Grouping

Application:

Match each component of the Aggregate Demand equation with its economic meaning.

Final Logic:

Only Option D correctly matches all four components.

🧠 Memory Trick

"C̄–Constant, cY–Changes, Ī–Investment, c–Change Ratio."

📚 Chapter: Determination of Income and Employment

12 The Aggregate Demand function can be obtained by ____________ adding the consumption and investment functions on a graph.

A horizontally

B vertically

C diagonally

D exponentially

💡 Short Explanation

Aggregate Demand equals Consumption plus Investment. Graphically, investment is added vertically to the consumption function. This produces the Aggregate Demand curve.

✅ Correct Answer Explanation

The Aggregate Demand function is AD=C+I Since investment is represented as a constant horizontal line, it is added vertically to every point on the consumption function to obtain the Aggregate Demand curve. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because horizontal addition is not used.
Option C) Incorrect because there is no diagonal addition in this graphical method.
Option D) Incorrect because exponential addition has no relevance.

🎯 Strategy

Used

Concept Identification

Application:

Recall the graphical construction of the Aggregate Demand curve.

Final Logic:

Aggregate Demand is obtained by vertical addition, making Option B correct.

🧠 Memory Trick

"Consumption + Investment = Vertical Shift."

📚 Chapter: Determination of Income and Employment

13 In the derivation of equilibrium income
Y=A/1-c,
an increase in total autonomous expenditure (A) will lead to:

A A proportional decrease in equilibrium income.

B No change in the equilibrium income.

C An exactly equal increase in equilibrium income.

D A multiplied increase in equilibrium income.

💡 Short Explanation

Autonomous expenditure is magnified through the multiplier process. The multiplier is 1/1-c. Therefore, equilibrium income increases by more than the initial increase in autonomous expenditure.

✅ Correct Answer Explanation

The equilibrium income equation is Y=A/1-c where 1/1-c is the investment multiplier. When autonomous expenditure increases, the multiplier causes a multiple increase in equilibrium income rather than a one-to-one increase. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because equilibrium income rises, not falls.
Option B) Incorrect because equilibrium income changes when autonomous expenditure changes.
Option C) Incorrect because the increase is multiplied, not exactly equal.

🎯 Strategy

Used

Formula-Based Concept

Application:

Use the equilibrium income formula to determine the effect of a rise in autonomous expenditure.

Final Logic:

Since
Y=A/1-c,
an increase in Ā produces a multiplied increase in income.

🧠 Memory Trick

"More Ā → Multiplier → Much More Y."

📚 Chapter: Determination of Income and Employment

14 Regarding A=C+I, identify the correct analytical statements.
Statements:
1. The stability of A is compromised by the periodic fluctuations of I.
2. C represents the subsistence consumption level which fluctuates wildly.
3. If I undergoes a severe drop, A will correspondingly decrease.
4. Since C is stable over time, any major short-term shift in A is usually driven by I.

A 1, 3 and 4

B 2, 3 and 4

C 1 and 3 only

D 1, 2 and 4

💡 Short Explanation

Autonomous expenditure consists of autonomous consumption and autonomous investment. Autonomous consumption is relatively stable. Changes in autonomous investment are the major source of fluctuations in autonomous expenditure.

✅ Correct Answer Explanation

Evaluate each statement: Statement 1: Correct. Since Ā = C̄ + Ī, fluctuations in Ī directly affect the stability of Ā. Statement 2: Incorrect. Autonomous consumption (C̄) is relatively stable and does not fluctuate wildly. Statement 3: Correct. A fall in Ī reduces total autonomous expenditure. Statement 4: Correct. Because C̄ is relatively stable, most short-run changes in Ā are driven by changes in Ī. Thus, the correct combination is 1, 3 and 4. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because Statement 2 is false.
Option C) Incorrect because Statement 4 is also correct.
Option D) Incorrect because Statement 2 is incorrect.

🎯 Strategy

Used

Statement Elimination

Application:

Evaluate each statement using the relationship:
A=C+I

Final Logic:

Only Statements 1, 3 and 4 are correct, making Option A the correct answer.

🧠 Memory Trick

"Stable C̄, Variable Ī."

📚 Chapter: Determination of Income and Employment

15 If ex ante Aggregate Demand is 800 and actual output (Y) produced by firms is 1000, what occurs in the economy to restore Y=AD?

A Unintended depletion of inventory by 200, prompting firms to produce more.

B Planned accumulation of inventory by 200, keeping output stable.

C Unintended accumulation of inventory by 200, prompting firms to cut output.

D Autonomous investment autonomously increases by 200 to clear the market.

💡 Short Explanation

Planned output exceeds planned demand. Unsold goods accumulate as inventories. Firms reduce future production to restore equilibrium.

✅ Correct Answer Explanation

Given: Ex ante Aggregate Demand = 800 Planned Output (Y) = 1000 Difference: 1000-800=200 Since firms produced Rs. 200 more than consumers planned to purchase, inventories accumulate unexpectedly. This unintended accumulation of inventories signals firms to reduce production until: Y=AD Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because inventories accumulate rather than deplete.
Option B) Incorrect because the accumulation is unplanned, not planned.
Option D) Incorrect because autonomous investment does not automatically adjust.

🎯 Strategy

Used

Application-Based Calculation

Application:

Compare planned output with planned demand.

Final Logic:

1000>800
Therefore, inventories accumulate by 200, making Option C correct.

🧠 Memory Trick

"Supply More → Stock More."

📚 Chapter: Determination of Income and Employment

16 Arrange the adjustment mechanism when ex ante demand exceeds ex ante supply.
Statements:
1. Producers increase their planned output to clear the excess demand.
2. The economy moves towards a new, higher equilibrium Y.
3. There is an unintended depletion of inventories.
4. Ex ante demand exceeds planned output (ex ante supply).

A 4, 3, 1, 2

B 3, 4, 1, 2

C 1, 2, 4, 3

D 4, 1, 3, 2

💡 Short Explanation

Planned demand initially exceeds planned output. Inventories fall unexpectedly because firms sell more than anticipated. Producers respond by increasing planned production. The economy eventually reaches a new, higher equilibrium level of income and output.

✅ Correct Answer Explanation

The adjustment process begins when ex ante demand exceeds planned output (4), creating excess demand in the economy. As consumers purchase more goods than firms had planned to produce, inventories are unintentionally depleted (3). Observing the fall in inventories, producers increase their planned output (1) to replenish stocks and satisfy the higher demand. As production expands, the economy moves towards a new, higher equilibrium level of income and output (2). Thus, the correct logical sequence is: 4 → 3 → 1 → 2 Hence, Option A is the correct answer.

❓ Why Other Options Are Incorrect

Option B → Incorrect because inventory depletion cannot occur before excess demand arises.
Option C → Incorrect because producers cannot increase output or reach a new equilibrium before excess demand is created.
Option D → Incorrect because producers increase output only after inventories have been depleted, not before.

🎯 Strategy

Used

Sequential Logic

Application: Start by identifying the economic imbalance, then follow its consequence, the producers' response, and finally the restoration of equilibrium.

Final Logic: The adjustment follows Excess Demand → Inventory Depletion → Higher Production → New Equilibrium, corresponding to 4 → 3 → 1 → 2.

🧠 Memory Trick

"Demand High → Stock Falls → Produce More → Equilibrium Restored."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Equilibrium Adjustment under Excess Demand

17 Match the concepts related to inventory adjustments with their algebraic/accounting representations.

List I	List II
1. Ex ante investment	a. Actual Sales − Planned Sales (Negative of this value)
2. Ex post investment	b. Fixed target stock level firm decides to hold
3. Planned inventory change	c. Planned physical capital addition + Planned inventory change
4. Unplanned inventory change	d. Planned investment + Unplanned inventory change

A 1-d, 2-c, 3-b, 4-a

B 1-b, 2-d, 3-c, 4-a

C 1-c, 2-a, 3-b, 4-d

D 1-c, 2-d, 3-b, 4-a

💡 Short Explanation

Ex ante investment consists of planned investment. Ex post investment includes both planned and unplanned inventory changes. Planned inventory is the target stock chosen by firms. Unplanned inventory arises when actual sales differ from planned sales.

✅ Correct Answer Explanation

The correct matching is: 1. Ex ante investment → c. Planned physical capital addition + Planned inventory change 2. Ex post investment → d. Planned investment + Unplanned inventory change 3. Planned inventory change → b. Fixed target stock level firm decides to hold 4. Unplanned inventory change → a. Actual Sales − Planned Sales (Negative of this value) Thus, the correct sequence is: 1-c, 2-d, 3-b, 4-a Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because ex ante investment does not include unplanned inventory.
Option B) Incorrect because planned inventory change is not ex ante investment itself.
Option C) Incorrect because ex post investment is not represented only by actual sales.

🎯 Strategy

Used

Option Grouping

Application:

Match each inventory concept with its accounting interpretation.

Final Logic:

Only Option D correctly matches all four concepts.

🧠 Memory Trick

"Plan → Ex Ante, Actual → Ex Post."

📚 Chapter: Determination of Income and Employment

18 When actual Yis equal to actual C+I, but planned Yis greater than planned C+I, the extra output shows up as __________ accumulation of inventories.

A intended

B unintended

C autonomous

D deficient

💡 Short Explanation

Firms produce more than consumers plan to buy. Unsold goods remain in stock. These inventories accumulate unintentionally.

✅ Correct Answer Explanation

When Planned Output > Planned Aggregate Demand some goods remain unsold. These unsold goods become unplanned (unintended) inventory accumulation. Although actual output always equals actual expenditure through accounting, the difference between planned output and planned demand appears as unintended inventory investment. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because firms did not intend this additional accumulation.
Option C) Incorrect because autonomous refers to expenditure independent of income.
Option D) Incorrect because "deficient" describes demand, not inventory accumulation.

🎯 Strategy

Used

Concept Identification

Application:

Relate planned output exceeding planned demand to inventory adjustment.

Final Logic:

Extra unsold goods become unintended inventories, making Option B correct.

🧠 Memory Trick

"Unsold Goods = Unintended Stocks."

📚 Chapter: Determination of Income and Employment

📄 Passage

"Note that G-cT, like C or I, just adds to the autonomous term A. It does not significantly change the analysis in any qualitative way. We shall, for the sake of simplicity, ignore the government sector for the rest of this chapter. Observe also, that without the government imposing indirect taxes and subsidies, the total value of final goods and services produced in the economy, GDP, becomes identically equal to the National Income."

According to the passage, how does the term -cTbehave in the expanded macroeconomic model?

A It merely acts as a deduction to the total autonomous term A.

B It completely changes the qualitative analysis of the multiplier mechanism.

C It causes the marginal propensity to consume to become zero.

D It strictly represents the planned inventory of the government.

💡 Short Explanation

Taxes reduce disposable income. The term -cT lowers autonomous expenditure. It does not alter the basic multiplier analysis.

✅ Correct Answer Explanation

The passage explains that G-cT simply becomes part of the autonomous expenditure term. Thus, Government expenditure increases autonomous demand. Taxes reduce autonomous expenditure through the term −cT. The qualitative analysis of the Keynesian model remains unchanged. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the passage explicitly states that the qualitative analysis does not change.
Option C) Incorrect because taxes do not make MPC zero.
Option D) Incorrect because the term has nothing to do with government inventories.

🎯 Strategy

Used

Passage-Based Concept Identification

Application:

Identify the economic meaning of −cT directly from the passage.

Final Logic:

The term −cT reduces autonomous expenditure, making Option A correct.

🧠 Memory Trick

"Taxes Reduce Autonomous Demand."

📚 Chapter: Determination of Income and Employment

📄 Passage

Based on the passage, what condition allows GDP to be identically equal to National Income?

A The inclusion of heavy government expenditures.

B The presence of a high marginal propensity to consume.

C The absence of government imposing indirect taxes and subsidies.

D The total elimination of autonomous investment in the economy.

💡 Short Explanation

Without indirect taxes and subsidies, GDP equals National Income. This equality is assumed in the simple Keynesian model. Therefore, GDP and National Income become identical.

✅ Correct Answer Explanation

The passage clearly states that without indirect taxes and subsidies, the total value of final goods and services produced (GDP) becomes identically equal to National Income. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because government expenditure does not determine this equality.
Option B) Incorrect because MPC has no role in defining GDP and National Income equality.
Option D) Incorrect because autonomous investment is unrelated to this accounting condition.

🎯 Strategy

Used

Passage-Based Concept Identification

Application:

Locate the exact condition stated in the passage for GDP to equal National Income.

Final Logic:

The absence of indirect taxes and subsidies makes GDP identically equal to National Income, making Option C correct.

🧠 Memory Trick

"No Indirect Taxes → GDP = National Income."

📚 Chapter: Determination of Income and Employment

CUET UG Economics Booster Test 3 - Investment and Aggregate Demand

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