CUET UG Economics Booster Test 2 - Multiplier and Advanced Concepts -

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CUET UG Economics Booster Test 2 - Multiplier and Advanced Concepts

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 2 - Multiplier and Advanced Concepts

1 / 20

QUESTION 1 OF 20

Match the economic concept to its correct definition or formula.

List I	List II
1. Investment Multiplier	a. Change in consumption per unit change in income
2. Marginal Propensity to Consume (MPC)	b. Ratio of total increment in output to initial increment in autonomous expenditure
3. Marginal Propensity to Save (MPS)	c. I=I(does not depend on income)
4. Autonomous Investment	d. Change in savings per unit change in income

Answer Review

1 Match the economic concept to its correct definition or formula.

List I	List II
1. Investment Multiplier	a. Change in consumption per unit change in income
2. Marginal Propensity to Consume (MPC)	b. Ratio of total increment in output to initial increment in autonomous expenditure
3. Marginal Propensity to Save (MPS)	c. I=I(does not depend on income)
4. Autonomous Investment	d. Change in savings per unit change in income

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

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

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

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

💡 Short Explanation

Each macroeconomic concept has a specific definition: Investment Multiplier measures the multiple increase in output. MPC measures additional consumption from additional income. MPS measures additional saving from additional income. Autonomous Investment is independent of income.

✅ Correct Answer Explanation

The correct matching is: 1. Investment Multiplier → b. Ratio of total increment in output to initial increment in autonomous expenditure 2. MPC → a. Change in consumption per unit change in income 3. MPS → d. Change in savings per unit change in income 4. Autonomous Investment → c. I=I Thus, the correct sequence is: 1-b, 2-a, 3-d, 4-c Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Investment Multiplier and MPC are mismatched.
Option C) Incorrect because Autonomous Investment and Multiplier are incorrectly paired.
Option D) Incorrect because MPS and Autonomous Investment are wrongly matched.

🎯 Strategy

Used

Concept Matching

Application: Recall the standard NCERT definitions of the four concepts.

Final Logic: Only Option B correctly matches every concept.

🧠 Memory Trick

"Multiplier–Output, MPC–Consumption, MPS–Saving, Autonomous–Independent."

📚 Chapter: Determination of Income and Employment

2 Arrange the sequential events in the working process of the multiplier when an initial investment is made.
Statements:
1. The income of the economy increases by 10.
2. Further excess demand is created in the next round.
3. Autonomous investment initially increases by 10.
4. Consumption goes up by 0.8×10 due to increased income.

A 1, 2, 3, 4

B 4, 3, 2, 1

C 3, 1, 4, 2

D 3, 4, 1, 2

💡 Short Explanation

The multiplier begins with investment, followed by income generation, induced consumption, and then further rounds of excess demand.

✅ Correct Answer Explanation

The sequence is: Step 1: Autonomous investment increases by ₹10. Step 2: Income increases by ₹10. Step 3: Consumption rises by 0.8×10=₹8. Step 4: This creates further excess demand, beginning the next round. Thus, the correct order is: 3 → 1 → 4 → 2 Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because investment must occur before income rises.
Option B) Incorrect because consumption cannot increase before investment.
Option D) Incorrect because income rises before induced consumption.

🎯 Strategy

Used

Sequential Logic

Application: Follow the multiplier process in chronological order.

Final Logic: Investment → Income → Consumption → Next Round.

🧠 Memory Trick

"Invest → Earn → Spend → Repeat."

📚 Chapter: Determination of Income and Employment

3 Which of the following statements correctly describes the successive rounds of the multiplier mechanism?

A The increments in Aggregate Demand dwindle in each successive round as people spend only a fraction (MPC) of their additional income.

B Consumers spend their entire additional income on consumption in each successive round.

C The process diverges infinitely, causing output to expand without any bounds.

D Unintended inventory accumulation forcefully stops the multiplier process in exactly the second round.

💡 Short Explanation

Each round of the multiplier is smaller because households save part of their additional income and spend only the MPC fraction.

✅ Correct Answer Explanation

After each increase in income: Consumers spend only a fraction equal to MPC. The remaining income is saved. Therefore, each successive increase in Aggregate Demand becomes progressively smaller. This creates a convergent geometric series, eventually leading to a new equilibrium. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because consumers save part of additional income unless MPC = 1.
Option C) Incorrect because the multiplier converges, not diverges, when 0<MPC<1.
Option D) Incorrect because the multiplier process continues through many rounds, not just two.

🎯 Strategy

Used

Concept Application

Application: Apply the successive-round mechanism of the Keynesian multiplier.

Final Logic: Each round becomes smaller because only a fraction of income is spent. Therefore, Option A is correct.

🧠 Memory Trick

"Spend a Fraction, Save the Rest."

📚 Chapter: Determination of Income and Employment

4 The infinite geometric series representing income propagation in the economy is given by:
10+(0.8)10+(0.8)^210+⋯
The mathematical sum of this infinite series is calculated as:

A 10÷0.8

B 10×0.8

C 10÷0.8

D 10÷(1-0.8)

💡 Short Explanation

The multiplier process forms an infinite geometric progression, whose sum is: a/1-r where a is the first term and r is the common ratio (MPC).

✅ Correct Answer Explanation

Here, First term, a=10 Common ratio, r=0.8 Using the geometric series formula, S=a/1-r=10/1-0.8=10/0.2=50 Thus, the required expression is 10/1-0.8 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because dividing by MPC alone is not the geometric series formula.
Option B) Incorrect because it gives only the second-round increase.
Option C) Incorrect because it is identical to Option A and still uses the wrong formula.

🎯 Strategy

Used

Formula Application

Application: Use the infinite geometric series formula.

Final Logic:

S=a/1-r
Therefore, Option D is correct.

🧠 Memory Trick

"First Term over One Minus Ratio."

📚 Chapter: Determination of Income and Employment

5 If the Marginal Propensity to Save (MPS) in an economy is 0.5, what is the value of the investment multiplier?
(Note: MPS = 1 − MPC)

A 0.5

B 2

C 5

D 10

💡 Short Explanation

The multiplier can be written as: k=1/MPS

✅ Correct Answer Explanation

Given, MPS=0.5 Multiplier, k=1/0.5=2 Alternatively, MPC=1-0.5=0.5k=1/1-0.5=2 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it is the value of MPS.
Option C) Incorrect because it corresponds to MPS = 0.2.
Option D) Incorrect because it corresponds to MPS = 0.1.

🎯 Strategy

Used

Direct Formula

Application:

k=1/MPS

Final Logic:

1/0.5=2
Therefore, Option B is correct.

🧠 Memory Trick

"Multiplier = One over MPS."

📚 Chapter: Determination of Income and Employment

6 Assertion (A): The size of the multiplier increases as the value of the Marginal Propensity to Consume (MPC) becomes larger.
Reason (R): A larger MPC means a smaller fraction of extra income is saved, leading to larger induced consumption in each successive round.

A Both true, R does not explain A

B Both true, R explains A

C A true, R false

D Both false

💡 Short Explanation

A higher MPC means households spend more of every additional rupee earned, creating larger successive rounds of expenditure and a larger multiplier.

✅ Correct Answer Explanation

Multiplier formula: k=1/1-c As MPC (c) increases, households save less, induced consumption becomes larger, each round of spending becomes larger, the multiplier increases. Thus, Assertion is True. Reason is True. The Reason correctly explains the Assertion. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the Reason directly explains the Assertion.
Option C) Incorrect because the Reason is true.
Option D) Incorrect because both statements are correct.

🎯 Strategy

Used

Assertion–Reason Analysis

Application: Connect MPC with the multiplier formula.

Final Logic:

Higher MPC → Higher induced consumption → Larger multiplier.
Therefore, Option B is correct.

🧠 Memory Trick

"Spend More → Bigger Multiplier."

📚 Chapter: Determination of Income and Employment

7 If autonomous expenditure initially increases by 50 and the multiplier is 4, the initial increase in the value of total output in Round 1 is equal to the initial increment in autonomous expenditure, which is ________, before any subsequent rounds occur.

A 200

B 4

C 50

D 12.5

💡 Short Explanation

The first round of the multiplier process is always equal to the initial autonomous expenditure. The multiplier affects the total increase after all successive rounds.

✅ Correct Answer Explanation

Given: Initial autonomous expenditure = 50 Multiplier = 4 In Round 1, Aggregate Demand and output increase only by the initial investment: ΔY_1=ΔI=50 The multiplier comes into effect only through later rounds of induced consumption. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because 200 is the total increase after the multiplier process.
Option B) Incorrect because 4 is the multiplier, not the first-round output increase.
Option D) Incorrect because it has no relation to the first-round increase.

🎯 Strategy

Used

Concept Application

Application: Distinguish between the initial increase and the total multiplier effect.

Final Logic: First-round output always equals the initial autonomous expenditure. Therefore, Option C is correct.

🧠 Memory Trick

"Round 1 = Initial Investment."

📚 Chapter: Determination of Income and Employment

8 With an initial increment in autonomous expenditure of ₹20 and an MPC of 0.5, what is the total effect on the equilibrium output?

A 40

B 20

C 10

D 100

💡 Short Explanation

Use the multiplier formula: k=1/1-c Then, ΔY=k×ΔI

✅ Correct Answer Explanation

Given: Initial autonomous expenditure = ₹20 MPC = 0.5 Multiplier: k=1/1-0.5=2 Total increase in output: ΔY=2×20=40 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because it ignores the multiplier effect.
Option C) Incorrect because output cannot be less than the initial increase in this case.
Option D) Incorrect because the multiplier is 2, not 5.

🎯 Strategy

Used

Formula Application

Application:

Calculate:
k=1/1-c
Then,
ΔY=k×ΔI

Final Logic:

2×20=40
Therefore, Option A is correct.

🧠 Memory Trick

"Multiplier × Investment = Total Output."

📚 Chapter: Determination of Income and Employment

9 When autonomous investment increases, the AD line shifts in parallel upwards. Graphically, what measures the amount of excess demand that emerges initially at the old equilibrium output?

A The specific slope of the AD curve.

B The exact coordinate of the new equilibrium point.

C The numerical value of the multiplier.

D The vertical distance between the new AD line and the old equilibrium point.

💡 Short Explanation

An increase in autonomous investment shifts the Aggregate Demand curve upward in parallel. The initial excess demand is represented by the vertical gap between the old and new AD curves.

✅ Correct Answer Explanation

When autonomous investment increases: The slope of the AD curve remains unchanged. The curve shifts upward by the amount of the increase in autonomous investment. At the old equilibrium income, this upward shift creates an initial excess demand, measured by the vertical distance between the old and new AD curves. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the slope is determined by MPC, not by autonomous investment.
Option B) Incorrect because the new equilibrium is established only after the multiplier process.
Option C) Incorrect because the multiplier measures the total effect, not the initial excess demand.

🎯 Strategy

Used

Graph Interpretation

Application: Identify the graphical measure of the initial excess demand after an upward shift in AD.

Final Logic: The vertical gap between the two AD curves measures the initial excess demand. Therefore, Option D is correct.

🧠 Memory Trick

"Parallel Shift = Vertical Gap."

📚 Chapter: Determination of Income and Employment

10 Which of the following statements is true regarding the output change following an autonomous change in Aggregate Demand?

A The output change is exactly equal to the autonomous change.

B The output change is strictly less than the autonomous change.

C The output change is greater than the initial increment in autonomous expenditure.

D Output always remains constant due to the Paradox of Thrift.

💡 Short Explanation

The multiplier process causes the increase in equilibrium output to be greater than the initial autonomous increase in spending.

✅ Correct Answer Explanation

An increase in autonomous expenditure generates: An initial rise in Aggregate Demand. Additional rounds of induced consumption. Repeated increases in income and output. Therefore, ΔY=k×ΔA where k>1. Hence, the final increase in output is greater than the initial autonomous expenditure. Thus, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because it ignores the multiplier effect.
Option B) Incorrect because the multiplier makes the output increase larger, not smaller.
Option D) Incorrect because the Paradox of Thrift concerns increased saving, not every autonomous demand change.

🎯 Strategy

Used

Concept Application

Application: Apply the Keynesian multiplier principle.

Final Logic: The multiplier ensures that the final increase in output exceeds the initial increase in autonomous expenditure. Therefore, Option C is correct.

🧠 Memory Trick

"Small Push → Bigger Output."

📚 Chapter: Determination of Income and Employment

11 The Paradox of Thrift specifically implies that a sudden shift in people's expenditure pattern where they become more thrifty results in:

A A decline or no change in the total value of savings.

B A rapid and sustained increase in National Income.

C An upward swing of the Aggregate Demand line.

D A significant decrease in the Marginal Propensity to Save.

💡 Short Explanation

The Paradox of Thrift states that when everyone tries to save more, Aggregate Demand falls, causing National Income to decline. As a result, actual aggregate savings may remain unchanged or even decrease.

✅ Correct Answer Explanation

When households collectively become more thrifty: Consumption expenditure decreases. Aggregate Demand shifts downward. National Income falls through the multiplier process. Since income declines, the increase in desired saving is offset by lower income. Therefore, the economy experiences no increase or even a decline in total savings. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because National Income falls rather than increases.
Option C) Incorrect because Aggregate Demand swings downward, not upward.
Option D) Incorrect because becoming more thrifty means MPS increases, not decreases.

🎯 Strategy

Used

Concept Application

Application: Apply the Keynesian Paradox of Thrift.

Final Logic: Higher saving → Lower consumption → Lower income → Savings remain unchanged or decrease.

🧠 Memory Trick

"Save More Together, Save Less Altogether."

📚 Chapter: Determination of Income and Employment

12 Suppose initial Y=250and C=40+0.8Y. If people become thrifty and MPC drops to 0.5, the new equilibrium Ybecomes 100. What is the total outcome on absolute savings before and after the shift?

A Savings remain unchanged at 10 in both equilibrium cases.

B Savings increase dramatically from 10 to 50.

C Savings decrease proportionally from 50 to 10.

D Savings immediately become negative in the short run.

💡 Short Explanation

Although people try to save more, the fall in National Income offsets this effort, leaving equilibrium savings unchanged—this is the Paradox of Thrift.

✅ Correct Answer Explanation

Initially: Y=250C=40+0.8(250)=240S=250-240=10 After thrift increases: Y=100C=40+0.5(100)=90S=100-90=10 Thus, Initial Savings = ₹10 New Savings = ₹10 Savings remain unchanged despite households attempting to save more. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because aggregate savings do not rise.
Option C) Incorrect because savings are unchanged.
Option D) Incorrect because savings remain positive.

🎯 Strategy

Used

Numerical Application

Application: Calculate savings before and after the change.

Final Logic:

S=Y-C
gives ₹10 in both situations.
Therefore, Option A is correct.

🧠 Memory Trick

"Income Falls, Savings Stall."

📚 Chapter: Determination of Income and Employment

13 Assertion (A): A decrease in MPC reduces the total output in the economy.
Reason (R): An increase in MPS reduces the slope of the Aggregate Demand line, causing a downward swing and leading to a lower equilibrium output.

A Both false

B A false, R true

C A true, R false

D Both true, R explains A

💡 Short Explanation

A lower MPC means lower induced consumption. This reduces the slope of the Aggregate Demand curve, lowers the multiplier, and decreases equilibrium output.

✅ Correct Answer Explanation

Since, MPS=1-MPC a decrease in MPC implies an increase in MPS. As a result: Aggregate Demand becomes flatter. The AD curve swings downward. The multiplier becomes smaller. Equilibrium income and output decrease. Thus, Assertion is True. Reason is True. The Reason correctly explains the Assertion. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because both statements are true.
Option B) Incorrect because the Assertion is true.
Option C) Incorrect because the Reason is also true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application: Relate MPC, MPS, Aggregate Demand, and equilibrium output.

Final Logic: Lower MPC → Higher MPS → Lower AD slope → Lower equilibrium output.

Therefore, Option D is correct.

🧠 Memory Trick

"Lower MPC → Lower AD → Lower Output."

📚 Chapter: Determination of Income and Employment

14 When the Marginal Propensity to Consume (MPC) changes from 0.8 to 0.5, the Aggregate Demand (AD) line experiences a ________, which effectively reduces the equilibrium output.

A Parallel upward shift

B Downward swing

C Upward swing

D Parallel downward shift

💡 Short Explanation

The slope of the Aggregate Demand curve depends on the Marginal Propensity to Consume (MPC). A fall in MPC reduces the slope, causing the AD curve to swing downward.

✅ Correct Answer Explanation

The Aggregate Demand function is: AD=A+cY where: A= Autonomous expenditure (intercept) c= MPC (slope) When MPC falls from 0.8 to 0.5: The intercept remains unchanged. The slope decreases. The AD curve rotates (swings) downward. The new equilibrium income becomes lower. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because a parallel upward shift occurs due to an increase in autonomous expenditure.
Option C) Incorrect because an upward swing requires an increase in MPC.
Option D) Incorrect because a parallel downward shift occurs due to a decrease in autonomous expenditure, not MPC.

🎯 Strategy

Used

Graph Interpretation

Application: Identify whether the change affects the intercept or the slope of the AD curve.

Final Logic: MPC determines the slope; therefore, a lower MPC causes a downward swing. Hence, Option B is correct.

🧠 Memory Trick

"MPC Changes → Curve Swings."

📚 Chapter: Determination of Income and Employment

15 Which statement accurately describes the link between equilibrium output and employment in macroeconomic theory?

A Equilibrium output always guarantees the full employment of all resources.

B A higher Marginal Propensity to Consume ensures full employment of labour.

C Equilibrium simply means the output level will not change left to itself, even if there is unemployment in the economy.

D Unused resources fundamentally cannot exist at any equilibrium level of output.

💡 Short Explanation

Keynesian equilibrium means the economy has no tendency to change output, but unemployment may still exist.

✅ Correct Answer Explanation

According to Keynesian theory: Equilibrium occurs when AD=AS or Y=AD. This equilibrium does not necessarily correspond to full employment. If Aggregate Demand is insufficient, the economy settles at an underemployment equilibrium, where output remains stable despite unemployed resources. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because equilibrium may occur below full employment.
Option B) Incorrect because a higher MPC alone cannot guarantee full employment.
Option D) Incorrect because unused resources can exist in equilibrium.

🎯 Strategy

Used

Concept Identification

Application: Recall the Keynesian concept of underemployment equilibrium.

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

🧠 Memory Trick

"Equilibrium Means Stable, Not Fully Employed."

📚 Chapter: Determination of Income and Employment

16 At the strictly defined full employment level of income:

A There is always persistent excess demand in the final goods market.

B The Aggregate Supply curve is perfectly inelastic in the short run.

C The law of diminishing returns does not apply to labour.

D All the available factors of production are fully employed in the production process.

💡 Short Explanation

Full employment income is the level at which all available labour, capital, land, and entrepreneurship are fully utilized.

✅ Correct Answer Explanation

At the full employment level: All productive resources are efficiently employed. The economy produces its maximum sustainable output. There are no involuntary unemployed resources. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because excess demand is not the definition of full employment.
Option B) Incorrect because this is not a defining characteristic of full employment.
Option C) Incorrect because the law of diminishing returns still applies in production.

🎯 Strategy

Used

Definition Identification

Application: Recall the NCERT definition of full employment.

Final Logic: Full employment means complete utilization of all productive resources. Therefore, Option D is correct.

🧠 Memory Trick

"Full Employment = Full Use of Factors."

📚 Chapter: Determination of Income and Employment

17 Match the specific demand conditions with their corresponding economic consequences.

List I	List II
1. Deficient demand	a. Leads to a rise in prices in the long run
2. Excess demand	b. Demand is not enough to employ all factors
3. Full employment	c. AD = Y
4. Macroeconomic equilibrium	d. All factors fully employed in the process

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

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

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

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

💡 Short Explanation

Deficient demand leads to unemployment because demand is insufficient. Excess demand creates inflationary pressure. Full employment means all productive resources are utilized. Macroeconomic equilibrium occurs when Aggregate Demand equals Aggregate Supply (Income).

✅ Correct Answer Explanation

The correct matching is: 1. Deficient demand → b. Demand is not enough to employ all factors 2. Excess demand → a. Leads to a rise in prices in the long run 3. Full employment → d. All factors fully employed in the process 4. Macroeconomic equilibrium → c. AD = Y Thus, the correct sequence is: 1-b, 2-a, 3-d, 4-c Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because deficient demand does not lead to rising prices.
Option C) Incorrect because macroeconomic equilibrium is represented by AD = Y, not full employment.
Option D) Incorrect because equilibrium is not defined by full employment.

🎯 Strategy

Used

Concept Matching

Application: Match each demand condition with its macroeconomic consequence.

Final Logic: Only Option B correctly pairs all four concepts.

🧠 Memory Trick

"Low Demand → Unemployment; High Demand → Inflation."

📚 Chapter: Determination of Income and Employment

18 If the equilibrium level of output is naturally more than the full employment level of output, the economy is primarily facing:

A A severe deflationary gap

B Deficient market demand

C A situation of excess demand

D High levels of unemployment

💡 Short Explanation

When Aggregate Demand exceeds the economy's full-employment output, it creates excess demand, resulting in inflationary pressure.

✅ Correct Answer Explanation

If equilibrium output exceeds the full-employment level: Aggregate Demand is greater than the economy's production capacity at full employment. Firms cannot sustainably increase output further. Prices begin to rise. This condition is known as excess demand. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because a deflationary gap is associated with deficient demand.
Option B) Incorrect because deficient demand results in output below full employment.
Option D) Incorrect because excess demand is generally associated with labour shortages rather than high unemployment.

🎯 Strategy

Used

Concept Application

Application: Distinguish between deficient demand and excess demand using the full-employment benchmark.

Final Logic: Output beyond the full-employment level indicates excess demand, making Option C correct.

🧠 Memory Trick

"Above Full Employment → Excess Demand → Inflation."

📚 Chapter: Determination of Income and Employment

📄 Passage

The theoretical model used in this chapter is based on the theory given by John Maynard Keynes. In this chapter, we deal with the determination of National Income under the assumption of a fixed price of final goods and a constant rate of interest in the economy. Under such circumstances, aggregate output is determined solely by the level of Aggregate Demand. This is known as the Effective Demand Principle.

According to the passage, under the fixed price and constant interest rate assumption, what solely determines the level of National Income?

A The level of Aggregate Demand

B The total supply of final goods

C The velocity of the money supply

D The overall Paradox of Thrift

💡 Short Explanation

According to Keynes' Effective Demand Principle, under fixed prices and a constant interest rate, Aggregate Demand alone determines National Income.

✅ Correct Answer Explanation

The passage explicitly states that: Prices remain fixed. Interest rates remain constant. Firms can supply output as demanded. Therefore, equilibrium National Income depends solely on Aggregate Demand. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because Aggregate Supply is assumed to be sufficiently elastic.
Option C) Incorrect because the money supply is not discussed in the passage.
Option D) Incorrect because the Paradox of Thrift is a separate Keynesian concept.

🎯 Strategy

Used

Passage-Based Concept

Application: Identify the central statement in the passage.

Final Logic: Aggregate Demand alone determines National Income. Therefore, Option A is correct.

🧠 Memory Trick

"Fixed Prices → Demand Decides Income."

📚 Chapter: Determination of Income and Employment

📄 Passage

The theoretical model demonstrating the Effective Demand Principle explicitly relies on the macroeconomic assumptions of:

A Variable prices and constant interest rates

B Fixed prices and variable interest rates

C Full employment and perfectly flexible wages

D Fixed price of final goods and constant rate of interest

💡 Short Explanation

The Keynesian model in this chapter assumes fixed prices and a constant interest rate so that Aggregate Demand determines equilibrium output.

✅ Correct Answer Explanation

As stated in the passage, the Effective Demand Principle is developed under two important assumptions: Fixed price of final goods Constant rate of interest These assumptions simplify the analysis by allowing changes in Aggregate Demand to directly determine National Income. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because prices are assumed to be fixed, not variable.
Option B) Incorrect because the interest rate is also assumed to remain constant.
Option C) Incorrect because the model does not assume full employment; Keynesian equilibrium may occur below full employment.

🎯 Strategy

Used

Passage-Based Definition

Application: Recall the assumptions underlying the Keynesian income determination model.

Final Logic: The Effective Demand Principle is based on fixed prices and a constant interest rate, making Option D correct.

🧠 Memory Trick

"Fixed Prices + Fixed Interest = Effective Demand Model."

📚 Chapter: Determination of Income and Employment

CUET UG Economics Booster Test 2 - Multiplier and Advanced Concepts

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