CUET UG Economics Booster Test 3 - Equilibrium and Determination -

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CUET UG Economics Booster Test 3 - Equilibrium and Determination

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 3 - Equilibrium and Determination

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QUESTION 1 OF 20

In the short-run fixed-price model, the principle of "effective demand" analytically dictates that:

Answer Review

1 In the short-run fixed-price model, the principle of "effective demand" analytically dictates that:

A Price levels are determined strictly by Aggregate Supply.

B Aggregate output is determined solely by the level of Aggregate Demand.

C Ex post investment drives ex ante consumption values.

D The government must directly manipulate the interest rate.

💡 Short Explanation

According to the Keynesian principle of Effective Demand, firms produce goods based on expected demand. In the short run, prices remain fixed. Therefore, Aggregate Demand determines equilibrium output.

✅ Correct Answer Explanation

The Principle of Effective Demand states that, under the fixed-price assumption, producers adjust output, not prices, in response to changes in demand. Hence, the equilibrium level of national income and output is determined by Aggregate Demand (AD). Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the model assumes Aggregate Supply adjusts to demand under fixed prices.
Option C) Incorrect because ex ante consumption is not determined by ex post investment.
Option D) Incorrect because government intervention in interest rates is not required for the principle of effective demand.

🎯 Strategy

Used

Concept Identification

Application: Recall the Keynesian Principle of Effective Demand.

Final Logic: Under fixed prices, Aggregate Demand determines output, making Option B correct.

🧠 Memory Trick

"Effective Demand → Effective Output."

📚 Chapter: Determination of Income and Employment

2 Assertion (A): Macroeconomic equilibrium under the fixed-price model always occurs at the full employment level.
Reason (R): Unused resources eventually cause the 45° line to swing mathematically downwards.

A Both false

B A true, R false

C Both true, R explains A

D A false, R true

💡 Short Explanation

Equilibrium may occur below full employment. The 45° line never changes its slope.

✅ Correct Answer Explanation

Assertion (A): False. Keynesian equilibrium can exist at less than full employment because Aggregate Demand may be insufficient. Reason (R): False. The 45° line always has a slope of 1 and does not rotate or swing due to unused resources. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the Assertion is false.
Option C) Incorrect because both statements are false.
Option D) Incorrect because the Reason is also false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application: Test both statements independently using the Keynesian model.

Final Logic: Both statements are false, making Option A correct.

🧠 Memory Trick

"Keynes: Equilibrium ≠ Full Employment."

📚 Chapter: Determination of Income and Employment

3 If an economy's consumption function is
C=50+0.5Y
and exogenous investment is
I=50,
what is the explicit graphical linear equation for the Aggregate Demand curve?

A AD = 50 + 0.5Y

B AD = 50 + 1.0Y

C AD = 100 + 1.0Y

D AD = 100 + 0.5Y

💡 Short Explanation

Aggregate Demand is: AD=C+I Substitute the given equations.

✅ Correct Answer Explanation

Given, C=50+0.5Y and I=50 Therefore, AD=C+I=50+0.5Y+50=100+0.5Y Hence, the Aggregate Demand equation is AD=100+0.5Y Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it ignores investment.
Option B) Incorrect because the slope incorrectly becomes 1.
Option C) Incorrect because both the intercept and slope are incorrect.

🎯 Strategy

Used

Formula Application

Application: Use the Aggregate Demand identity:

AD=C+I

Final Logic:

AD=(50+0.5Y)+50=100+0.5Y
Therefore, Option D is correct.

🧠 Memory Trick

"AD = Consumption + Investment."

📚 Bottom of Form

4 A sudden expansionary change in the autonomous fiscal variable 'Government Expenditure (G)' would graphically result in ________.

A a downward swing in the slope of the AD curve.

B a perfectly vertical Aggregate Demand line.

C a positive change in the intercept of the Aggregate Demand curve.

D an alteration of the 45° Supply line intercept.

💡 Short Explanation

Government Expenditure (G) is an autonomous component of Aggregate Demand. An increase in G raises autonomous expenditure. The Aggregate Demand (AD) curve shifts upward in parallel because only its intercept increases.

✅ Correct Answer Explanation

The Aggregate Demand equation with government is: AD=C+c(Y-T)+I+G Government expenditure (G) is autonomous and does not depend on income. Therefore, an increase in G raises the intercept of the Aggregate Demand curve while leaving its slope (c) unchanged. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the slope changes only when MPC (c) changes.
Option B) Incorrect because Aggregate Demand is never represented by a vertical line.
Option D) Incorrect because the 45° Aggregate Supply line remains unchanged.

🎯 Strategy

Used

Concept Identification

Application: Identify which component of the AD equation changes due to government expenditure.

Final Logic: Since G is autonomous, only the intercept increases, producing a parallel upward shift. Therefore, Option C is correct.

🧠 Memory Trick

"Government Spending ↑ → AD Intercept ↑."

📚 Chapter: Determination of Income and Employment

5 If a theoretical economy's income drops absolutely to zero, the positive consumption value represented by the intercept Cmust analytically be funded by ________.

A unexpected inventory accumulations.

B induced consumption components.

C immediate government tax revenues.

D past savings or borrowing, mathematically rendering S=-C.

💡 Short Explanation

At zero income, households may still consume. This consumption is financed through past savings or borrowing. Hence, savings become negative (dissaving).

✅ Correct Answer Explanation

The consumption function is: C=C+cY When Y=0, then C=C. Since S=Y-C, we get S=0-C=-C. Negative savings imply that households finance consumption using past savings or borrowing. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because inventory accumulation does not finance household consumption.
Option B) Incorrect because induced consumption depends on income, which is zero.
Option C) Incorrect because government taxes cannot exist without taxable income in this context.

🎯 Strategy

Used

Formula Application

Application: Apply the savings identity at Y = 0.

Final Logic:

S=Y-C=-C,
indicating dissaving, making Option D correct.

🧠 Memory Trick

"Zero Income → Borrow or Use Savings."

📚 Chapter: Determination of Income and Employment

6 The "Paradox of Thrift" algebraically manifests when a sudden behavioral increase in the MPS (which is a decrease in MPC) causes:

A A parallel upward shift in AD.

B A rightward rotation of the 45° line.

C A downward swing in the slope of the AD curve and a lower final equilibrium income.

D No tangible change in the equilibrium output Y^*.

💡 Short Explanation

A higher MPS means a lower MPC. A lower MPC reduces the slope of the Aggregate Demand curve. This lowers equilibrium income, illustrating the Paradox of Thrift.

✅ Correct Answer Explanation

Since MPC+MPS=1, an increase in MPS necessarily decreases MPC. The Aggregate Demand function is: AD=A+cY. As c decreases, the slope of the AD curve becomes flatter (swings downward). The reduced consumption spending lowers equilibrium income, even though people intend to save more. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because a change in MPC affects the slope, not the intercept.
Option B) Incorrect because the 45° Aggregate Supply line never rotates.
Option D) Incorrect because equilibrium income definitely falls.

🎯 Strategy

Used

Concept + Formula Application

Application: Use the relationship between MPC, MPS, and the Aggregate Demand function.

Final Logic:

Higher MPS → Lower MPC → Flatter AD → Lower Equilibrium Income. Therefore, Option C is correct.

🧠 Memory Trick

"Save More → Spend Less → Income Falls."

📚 Chapter: Determination of Income and Employment

7 Which complex statement correctly identifies why the ex ante investment curve is plotted as a perfectly horizontal line in this model?

A Investment is treated as an exogenous variable, entirely independent of the current level of GDP.

B Producers legally cannot change investment values once the fiscal year begins.

C It represents that the marginal propensity to invest equals exactly 1.

D Horizontal plotting is required to offset the 45° angle of supply perfectly.

💡 Short Explanation

In the simple Keynesian model, investment is assumed to be autonomous (exogenous). It does not vary with the current level of income. Hence, the investment function is drawn as a horizontal line.

✅ Correct Answer Explanation

The model assumes: I=I where Ī is autonomous investment. Since planned investment remains constant irrespective of GDP or national income, its graphical representation is a horizontal line parallel to the X-axis. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because there is no legal restriction on investment in the model.
Option C) Incorrect because there is no concept of "Marginal Propensity to Invest = 1" in this context.
Option D) Incorrect because the investment curve is horizontal due to an economic assumption, not to offset the 45° line.

🎯 Strategy

Used

Concept Identification

Application: Recall the assumption of autonomous investment in the Keynesian two-sector model.

Final Logic: Since investment is exogenous and independent of income, it is represented by a horizontal line. Therefore, Option A is correct.

🧠 Memory Trick

"Autonomous = Always Flat."

📚 Chapter: Determination of Income and Employment

8 Arrange the logical sequence demonstrating how deviations from the autonomous investment level connect to unintended inventory adjustments.
Statements:
1. Producers unexpectedly experience an unintended accumulation of unsold inventories.
2. Producers are forced to cut back their planned output heavily in the next production cycle.
3. Ex ante Aggregate Demand falls critically short of producers' planned output.
4. The actual ex post investment recorded exceeds the planned autonomous ex ante investment.

A 1, 4, 2, 3

B 3, 1, 4, 2

C 4, 2, 3, 1

D 2, 3, 1, 4

💡 Short Explanation

Aggregate Demand falls below the planned level of output. Unsold goods accumulate as unintended inventories. These inventories are recorded as unplanned ex post investment. Firms reduce production in the next production cycle to restore equilibrium.

✅ Correct Answer Explanation

The adjustment mechanism begins when ex ante Aggregate Demand falls short of producers' planned output (3). Since firms produce more than consumers purchase, unsold goods accumulate as unintended inventories (1). These excess inventories are treated as unplanned ex post investment, causing actual investment to exceed planned autonomous ex ante investment (4). To eliminate the excess stock, producers cut back their planned output in the next production cycle (2), moving the economy back towards equilibrium. Thus, the correct logical sequence is: 3 → 1 → 4 → 2 Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A → Incorrect because inventories cannot accumulate before Aggregate Demand first falls below planned output.
Option C → Incorrect because ex post investment is the result of inventory accumulation, not its cause.
Option D → Incorrect because producers reduce output only after unintended inventories have accumulated and been recorded as ex post investment.

🎯 Strategy

Used

Sequential Logic

Application: Begin with the initial economic imbalance (demand shortfall), trace its impact on inventories, identify the accounting treatment as ex post investment, and conclude with the producers' production response.

Final Logic: The progression is Demand Falls → Inventories Accumulate → Ex Post Investment Rises → Output Falls, corresponding to 3 → 1 → 4 → 2.

🧠 Memory Trick

"Low Demand → More Stocks → Ex Post Investment → Cut Output."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Inventory Adjustment and Ex Ante–Ex Post Investment

9 The geometric vertical difference between the Aggregate Demand curve and the Consumption curve at any given level of horizontal income explicitly represents ________.

A the total quantity of taxes collected.

B the constant level of autonomous investment (I).

C the exact value of unintended inventory accumulation.

D the variable Marginal Propensity to Consume.

💡 Short Explanation

Aggregate Demand equals Consumption plus Investment. Investment is constant in the simple model. Therefore, the vertical distance between AD and Consumption equals autonomous investment.

✅ Correct Answer Explanation

The Aggregate Demand function is AD=C+I Since I=I, Aggregate Demand is obtained by shifting the Consumption function vertically upward by Ī. Thus, the constant vertical gap between the two curves represents autonomous investment. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because taxes are not represented by the gap.
Option C) Incorrect because inventory changes are not shown by the constant vertical distance.
Option D) Incorrect because MPC determines the slope, not the vertical separation.

🎯 Strategy

Used

Graph Interpretation

Application: Interpret the graphical relationship between the Consumption and Aggregate Demand curves.

Final Logic: The constant vertical difference equals Ī, making Option B correct.

🧠 Memory Trick

"AD = Consumption + Constant Investment."

📚 Chapter: Determination of Income and Employment

10 Arrange the macroeconomic sequence of effects following a parallel upward shift of the Aggregate Demand curve due to a positive ΔI.
Statements:
1. Producers decide to increase physical output to clear this new excess demand.
2. A convergent multiplier effect ultimately drives aggregate output to a new, substantially higher equilibrium point.
3. An initial state of excess demand equal strictly to ΔI is created in the product market.
4. Factor incomes rise accordingly, thereby inducing further secondary consumption equal to cΔI.

A 3, 1, 4, 2

B 2, 4, 1, 3

C 1, 4, 2, 3

D 4, 3, 2, 1

💡 Short Explanation

A positive increase in autonomous investment creates excess demand in the product market. Producers respond by increasing output. The increase in production raises factor incomes, which stimulates additional consumption. Repeated rounds of spending generate the multiplier effect, leading to a higher equilibrium income.

✅ Correct Answer Explanation

The sequence begins when a positive increase in autonomous investment creates an initial excess demand equal to ΔIin the product market (3). To eliminate this excess demand, producers increase physical output (1). The additional production generates higher factor incomes, causing households to increase consumption by cΔI(4). This induced consumption creates further rounds of demand and production until the multiplier process converges to a new, higher equilibrium level of aggregate output (2). Thus, the correct logical sequence is: 3 → 1 → 4 → 2 Hence, Option A is the correct answer.

❓ Why Other Options Are Incorrect

Option B → Incorrect because it starts with the final equilibrium outcome instead of the initial excess demand created by the investment increase.
Option C → Incorrect because producers cannot increase output before excess demand first arises.
Option D → Incorrect because induced consumption occurs only after factor incomes have increased, not before excess demand is created.

🎯 Strategy

Used

Sequential Logic

Application: Identify the initial investment shock, trace the immediate market imbalance, follow the production and income responses, and conclude with the multiplier-driven equilibrium.

Final Logic: The progression is Excess Demand → Output → Income & Consumption → New Equilibrium, corresponding to 3 → 1 → 4 → 2.

🧠 Memory Trick

"Demand ↑ → Produce → Earn → Spend → Multiply."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Investment Multiplier Mechanism

11 Match the analytical elements of the 45° Aggregate Supply line.

List I	List II
1. 45° angle implication	a. Shows flawless equality of planned spending and actual income coordinates
2. Any coordinate point strictly on the line	b. Equals 1
3. Intersection point with AD curve	c. Represents the perfectly elastic Aggregate Supply in the fixed-price model
4. Mathematical slope of the 45° line	d. Uniquely determines the short-run macroeconomic equilibrium

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

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

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

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

💡 Short Explanation

The 45° line represents Aggregate Supply in the fixed-price Keynesian model. Every point on the line shows equality between income and output. The intersection with the AD curve determines equilibrium. The slope of the 45° line is always 1.

✅ Correct Answer Explanation

The correct matching is: 1. 45° angle implication → c. Represents the perfectly elastic Aggregate Supply in the fixed-price model 2. Any coordinate point strictly on the line → a. Shows flawless equality of planned spending and actual income coordinates 3. Intersection point with AD curve → d. Uniquely determines the short-run macroeconomic equilibrium 4. Mathematical slope of the 45° line → b. Equals 1 Thus, the correct sequence is: 1-c, 2-a, 3-d, 4-b Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the slope is not represented by option a.
Option B) Incorrect because the 45° angle itself represents Aggregate Supply, not equality at every point.
Option C) Incorrect because the equilibrium point is not the implication of the 45° angle.

🎯 Strategy

Used

Option Grouping

Application: Match each graphical property with its corresponding economic meaning.

Final Logic: Only Option D correctly matches all four elements.

🧠 Memory Trick

"45° → AS • Every Point → Income = Output • Slope = 1."

📚 Chapter: Determination of Income and Employment

12 Match the specific equilibrium boundary properties related to the 45° line.

List I	List II
1. Ex ante AD = Y	a. Is perfectly zero at equilibrium
2. Unintended inventory change at equilibrium	b. An alternate algebraic equilibrium condition
3. Ex ante Savings (S) = Ex ante Investment (I)	c. Occurs when Y > AD graphically
4. State of Excess Supply	d. The fundamental equality property fulfilled at intersection

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

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

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

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

💡 Short Explanation

At equilibrium, AD = Y. There is no unintended inventory change. S = I is the algebraic equilibrium condition. Excess supply exists when Y > AD.

✅ Correct Answer Explanation

The correct matching is: 1. Ex ante AD = Y → d. The fundamental equality property fulfilled at intersection 2. Unintended inventory change at equilibrium → a. Is perfectly zero at equilibrium 3. Ex ante Savings = Ex ante Investment → b. An alternate algebraic equilibrium condition 4. State of Excess Supply → c. Occurs when Y > AD graphically Thus, the correct sequence is: 1-d, 2-a, 3-b, 4-c Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Options A, B, and D incorrectly interchange equilibrium conditions and inventory changes.

🎯 Strategy

Used

Concept Matching

Application: Match each equilibrium property with its corresponding economic meaning.

Final Logic: Only Option C satisfies all four relationships.

🧠 Memory Trick

"AD = Y • Inventory = 0 • S = I."

📚 Chapter: Determination of Income and Employment

13 When Aggregate Demand is analytically less than Aggregate Supply (AD < AS), the equality property eventually restores equilibrium because ________.

A prices immediately drop to zero.

B consumers magically increase their autonomous spending.

C unplanned inventory heavily accumulates, forcing firms to contract output until Y drops to equal AD.

D the government automatically injects matching subsidies.

💡 Short Explanation

When firms produce more than consumers plan to buy, inventories increase unexpectedly. Firms respond by reducing production. Output continues to fall until Aggregate Demand equals Aggregate Supply.

✅ Correct Answer Explanation

If AD<AS, planned output exceeds planned expenditure. The unsold goods accumulate as unplanned inventories, increasing ex post investment. Producers recognize this excess stock and reduce future production until equilibrium is restored. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because prices are assumed to remain fixed in the Keynesian short-run model.
Option B) Incorrect because autonomous consumption does not increase automatically.
Option D) Incorrect because government intervention is not part of the adjustment mechanism described.

🎯 Strategy

Used

Concept Application

Application: Apply the Keynesian inventory adjustment process when AD < AS.

Final Logic:

AD < AS → Inventory Accumulation → Output Reduction → New Equilibrium, making Option C correct.

🧠 Memory Trick

"Supply More Than Demand → Stocks Rise → Produce Less."

📚 Chapter: Determination of Income and Employment

14 Match the specific Aggregate Demand (AD) graphical line shifts to their theoretical equilibrium outcomes.

List I	List II
1. AD line swings downwards	a. Indicates an exogenous increase in autonomous investment (I)
2. AD line shifts upwards in a parallel manner	b. Indicates an exogenous decrease in the MPC parameter
3. AD line shifts downwards in a parallel manner	c. Indicates an exogenous increase in the MPC parameter
4. AD line swings upwards	d. Indicates a sudden decrease in autonomous consumption (C)

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

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

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

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

💡 Short Explanation

A change in MPC changes the slope (swing) of the AD curve. A change in autonomous expenditure changes only the intercept, producing a parallel shift.

✅ Correct Answer Explanation

The correct matching is: 1. AD line swings downwards → b. Indicates an exogenous decrease in the MPC parameter 2. AD line shifts upwards in a parallel manner → a. Indicates an exogenous increase in autonomous investment (I) 3. AD line shifts downwards in a parallel manner → d. Indicates a sudden decrease in autonomous consumption (C) 4. AD line swings upwards → c. Indicates an exogenous increase in the MPC parameter Thus, the correct sequence is: 1-b, 2-a, 3-d, 4-c Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because an increase in autonomous investment causes a parallel upward shift, not a downward shift.
Option B) Incorrect because a decrease in MPC changes the slope rather than shifting the curve.
Option C) Incorrect because a decrease in autonomous consumption shifts the AD curve downward in parallel instead of changing its slope.

🎯 Strategy

Used

Graph Interpretation

Application: Distinguish between slope changes (MPC) and intercept changes (autonomous expenditure).

Final Logic: Slope → MPC; Parallel Shift → Autonomous Expenditure, making Option D correct.

🧠 Memory Trick

"MPC Moves the Slope; Autonomous Spending Moves the Curve."

📚 Chapter: Determination of Income and Employment

15 Match the algebraic components used in deriving the infinite geometric multiplier series.

List I	List II
1. Round 1 initial output increase	a. ΔI/(1 − c)
2. Round 2 induced consumption increase	b. ΔI
3. Sum of the infinite geometric series of output changes	c. 1/(1 − c)
4. The final investment multiplier formula	d. cΔI

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

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

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

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

💡 Short Explanation

The multiplier process starts with the initial investment. The second round generates induced consumption equal to cΔI. The sum of all rounds gives the total increase in income. The investment multiplier is 1/(1 − c).

✅ Correct Answer Explanation

The correct matching is: Round 1 initial output increase → ΔI (b) Round 2 induced consumption increase → cΔI (d) Sum of the infinite geometric series of output changes → ΔI/(1 − c) (a) Final investment multiplier formula → 1/(1 − c) (c) Thus, the correct sequence is: 1 → b 2 → d 3 → a 4 → c Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A. 1-a, 2-b, 3-c, 4-d → Incorrect because it confuses the total increase in income with the initial increase and interchanges the multiplier formula with induced consumption.
Option C. 1-c, 2-a, 3-b, 4-d → Incorrect because it mismatches every stage of the multiplier process.
Option D. 1-d, 2-b, 3-c, 4-a → Incorrect because the initial increase is not cΔI, and the final multiplier is not ΔI/(1 − c).

🎯 Strategy

Sequential Formula Matching

Application:

Follow the Keynesian multiplier process step by step:
Initial investment (ΔI)
Induced consumption (cΔI)
Total increase in income (ΔI/(1 − c))
Investment multiplier (1/(1 − c))

Final Logic:

Only Option B correctly follows the complete multiplier sequence.

🧠 Memory Trick

"ΔI → cΔI → ΔI/(1−c) → 1/(1−c)."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Investment Multiplier Derivation

16 If an economy's equilibrium income changes from 250 to 300 purely due to an autonomous investment increase of exactly 10 units, what must be the precise value of the Marginal Propensity to Consume (c)?

A 0.5

B 0.8

C 0.9

D 0.2

💡 Short Explanation

Use the multiplier formula: ΔY=k×ΔI where k=1/1-c.

✅ Correct Answer Explanation

Given: ΔY=300-250=50 and ΔI=10. Therefore, k=ΔY/ΔI=50/10=5. Now, 5=1/1-c1-c=0.2c=0.8. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Gives a multiplier of 2, not 5.
Option C) Gives a multiplier of 10.
Option D) Gives a multiplier of only 1.25.

🎯 Strategy

Used

Numerical Formula Application

Application: Calculate the multiplier first, then derive MPC.

Final Logic:

k=50/10=5c=1-1/5=0.8.
Therefore, Option B is correct.

🧠 Memory Trick

c=1-1/k.

📚 Chapter: Determination of Income and Employment

17 Which complex algebraic statement perfectly describes the net effect of the Paradox of Thrift on total savings?

A S_2=Y_2-(C+c_2Y_2)mathematically remains exactly equal to S_1 despite a higher MPS.

B S_2 becomes strictly larger than S_1 due to the lower MPC.

C S_1 approaches infinity as Y approaches zero.

D S_2 becomes negative because all autonomous spending is permanently wiped out.

💡 Short Explanation

The Paradox of Thrift states that if everyone tries to save more, national income falls. The fall in income offsets the higher saving tendency. As a result, total equilibrium savings remain unchanged.

✅ Correct Answer Explanation

When households increase their propensity to save: MPS increases MPC decreases Aggregate Demand falls. Equilibrium income declines. Although people intend to save more, the reduction in income causes actual aggregate savings to remain unchanged in equilibrium because: S=I and autonomous investment has not changed. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because aggregate savings do not necessarily increase; the fall in income offsets the higher saving rate.
Option C) Incorrect because savings do not become infinite as income approaches zero.
Option D) Incorrect because autonomous expenditure is not eliminated by the Paradox of Thrift.

🎯 Strategy

Used

Concept Application

Application: Apply the Keynesian Paradox of Thrift.

Final Logic: Higher desired saving lowers income, leaving equilibrium savings unchanged. Therefore, Option A is correct.

🧠 Memory Trick

"Try to Save More → Earn Less → Save the Same."

📚 Chapter: Determination of Income and Employment

18 Arrange the geometric series progression rounds detailing the multiplier effect, assuming an initial ΔI=₹100and an MPC = 0.5.
Statements:
1. The infinite series sum of total income converges precisely to ₹200.
2. Total national income increases initially by exactly ₹100.
3. In the third round, secondary consumption increases further by ₹25.
4. In the very next round, consumption systematically increases by ₹50.

A 4, 3, 1, 2

B 2, 4, 3, 1

C 1, 3, 4, 2

D 2, 3, 4, 1

💡 Short Explanation

The multiplier process begins with an initial investment of ₹100. The first induced consumption is ₹50 (MPC = 0.5). The next round of induced consumption is ₹25. The infinite geometric series converges to a total increase in income of ₹200.

✅ Correct Answer Explanation

Given an initial investment of ₹100 and an MPC of 0.5, the multiplier process unfolds in successive rounds. It begins when national income initially increases by ₹100 (2) due to the autonomous investment. In the next round, households spend 50% of the additional income, increasing consumption by ₹50 (4). This generates another round in which consumption rises further by ₹25 (3). The process continues indefinitely with progressively smaller increases until the infinite geometric series converges to a total increase in national income of ₹200 (1). Thus, the correct logical sequence is: 2 → 4 → 3 → 1 Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A → Incorrect because it begins with the first induced consumption instead of the initial investment-induced increase in income.
Option C → Incorrect because it starts with the final outcome before describing the successive rounds of the multiplier process.
Option D → Incorrect because the ₹25 increase occurs only after the ₹50 increase in the second round.

🎯 Strategy

Used

Sequential Logic + Formula

Application: Begin with the initial investment, follow each successive round of induced consumption according to the MPC, and conclude with the total value of the infinite geometric series.

Final Logic: The progression is Initial Income → ₹50 Consumption → ₹25 Consumption → Final Multiplier, corresponding to 2 → 4 → 3 → 1.

🧠 Memory Trick

"100 → 50 → 25 → 200."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Investment Multiplier Process

📄 Passage

"Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment level of output, it is due to the fact that demand is not enough to employ all factors of production."

According to the passage's strict definition, an income change that successfully reaches an equilibrium state guarantees:

A Flawless price stability in the long run.

B Zero unintended accumulation of inventory and maximum full employment.

C Stability in the overall output level, but absolutely not necessarily full employment.

D That the multiplier process has failed completely.

💡 Short Explanation

Equilibrium simply means there is no tendency for output to change. It does not imply that all resources are fully employed.

✅ Correct Answer Explanation

The passage clearly states that equilibrium may occur below full employment when Aggregate Demand is insufficient. Thus: Output remains stable. Unemployment may still exist. Full employment is not guaranteed. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the passage is about equilibrium output, not long-run price stability.
Option B) Incorrect because equilibrium does not necessarily imply full employment.
Option D) Incorrect because the multiplier process is unrelated to the definition of equilibrium given here.

🎯 Strategy

Used

Passage-Based Application

Application: Focus on the passage's definition of equilibrium.

Final Logic: Equilibrium means stability of output, not necessarily full employment. Therefore, Option C is correct.

🧠 Memory Trick

"Equilibrium ≠ Full Employment."

📚 Chapter: Determination of Income and Employment

📄 Passage

Based on the passage, what specific macroeconomic situation arises at the new equilibrium if the ex ante Aggregate Demand is strictly less than the output physically produced at the full employment level?

A A situation of radical excess demand.

B The Paradox of Thrift instantly reverses.

C The multiplier mathematically becomes a fraction.

D It firmly results in a situation classified as deficient demand.

💡 Short Explanation

If Aggregate Demand is below the level needed for full-employment output, firms cannot sell all the goods required to employ all resources. This creates deficient demand, leading to underemployment equilibrium.

✅ Correct Answer Explanation

According to Keynesian theory, when Aggregate Demand is insufficient to purchase the full-employment level of output: Firms reduce production. Employment falls. The economy settles at an equilibrium below full employment. This condition is called deficient demand. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Aggregate Demand is lower, not higher.
Option B) Incorrect because the passage does not discuss a reversal of the Paradox of Thrift.
Option C) Incorrect because the multiplier remains 1/1-c; it is not determined by this situation.

🎯 Strategy

Used

Passage-Based Concept Application

Application: Apply the Keynesian explanation of underemployment equilibrium due to insufficient Aggregate Demand.

Final Logic: Lower Aggregate Demand than full-employment output leads to deficient demand, making Option D correct.

🧠 Memory Trick

"Low AD → Deficient Demand → Underemployment."

📚 Chapter: Determination of Income and Employment

CUET UG Economics Booster Test 3 - Equilibrium and Determination

Test Complete!

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