CUET UG Economics Booster Test 3 - Consumption and Saving -

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CUET UG Economics Booster Test 3 - Consumption and Saving

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 3 - Consumption and Saving

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QUESTION 1 OF 20

Assertion (A): The simple consumption function implies that consumption changes at a constant rate as income changes.
Reason (R): It assumes a linear relation described by a constant slope c (MPC).

Answer Review

1 Assertion (A): The simple consumption function implies that consumption changes at a constant rate as income changes.
Reason (R): It assumes a linear relation described by a constant slope c (MPC).

A Both false

B A false, R true

C A true, R false

D Both true, R explains A

💡 Short Explanation

The simple consumption function is linear. The slope of the function is the Marginal Propensity to Consume (MPC). Since the slope is constant, consumption changes at a constant rate with income.

✅ Correct Answer Explanation

The Assertion is true because the Keynesian consumption function is represented as: C=C+cY where c (MPC) remains constant. Therefore, every additional unit of income increases consumption by the same proportion, implying a constant rate of change. The Reason is also true because the consumption function is assumed to be linear, and the constant slope is represented by c (MPC). This constant slope directly explains why consumption changes at a constant rate as income changes. Hence, Option D is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Both false → Incorrect because both the Assertion and the Reason are true.
Option B) A false, R true → Incorrect because the Assertion is true.
Option C) A true, R false → Incorrect because the Reason is also true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Evaluate the truth of both statements and determine whether the Reason correctly explains the Assertion using the Keynesian consumption function.

Final Logic:

Since both statements are true and the Reason correctly explains the Assertion, Option D is correct.

🧠 Memory Trick

"Linear Function → Constant Slope → Constant MPC."

📚 Chapter: Determination of Income and Employment

2 Evaluate the following statements regarding the linear consumption function graph.
Statements:
1. The consumption line passes directly through the origin (0,0).
2. The tangent of the angle α formed by the curve equals the autonomous intercept.

A Both Statements 1 and 2 are incorrect.

B Only Statement 2 is correct.

C Both Statements 1 and 2 are correct.

D Only Statement 1 is correct.

💡 Short Explanation

The consumption line usually starts from the autonomous consumption intercept, not the origin. The tangent of angle α represents the slope (MPC), not the autonomous intercept.

✅ Correct Answer Explanation

Statement 1 is incorrect because the consumption function C=C+cY has a vertical intercept equal to autonomous consumption (C̄). Therefore, unless autonomous consumption is zero, the graph does not pass through the origin. Statement 2 is also incorrect because the tangent of angle α (tan α) measures the slope of the consumption function, which is the Marginal Propensity to Consume (MPC). It does not represent the autonomous consumption intercept. Hence, both statements are incorrect, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) Only Statement 2 is correct → Incorrect because Statement 2 is false.
Option C) Both Statements 1 and 2 are correct → Incorrect because both statements are false.
Option D) Only Statement 1 is correct → Incorrect because Statement 1 is false.

🎯 Strategy

Used

Elimination

Application:

Evaluate each statement independently by identifying the intercept and slope of the consumption function graph.

Final Logic:

Since both statements are incorrect, Option A is correct.

🧠 Memory Trick

"Intercept = C̄, tan α = MPC."

📚 Chapter: Determination of Income and Employment

3 Match the terms with their structural role in the equation
C=C+cY

List I	List II
1. C̄	a. Income independent parameter
2. c	b. Total resulting value
3. Y	c. Independent variable
4. C	d. Slope parameter

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

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

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

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

💡 Short Explanation

C̄ is autonomous consumption and is independent of income. c represents the slope (MPC). Y is the independent variable. C is the total consumption obtained from the equation.

✅ Correct Answer Explanation

In the equation C=C+cY, the variables represent: C̄ → Income independent parameter c → Slope parameter (MPC) Y → Independent variable (Income) C → Total resulting value (Consumption) Thus, the correct matching is: 1 → a 2 → d 3 → c 4 → b Hence, Option C is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Incorrect because autonomous consumption is not the independent variable.
Option B) Incorrect because C is the resulting value, not the income-independent parameter.
Option D) Incorrect because C̄ and C are incorrectly matched.

🎯 Strategy

Used

Option Grouping

Application:

Identify the role of each symbol in the Keynesian consumption function and match it with its definition.

Final Logic:

Only Option C correctly matches all four components.

🧠 Memory Trick

"C̄–Auto, c–Slope, Y–Income, C–Consumption."

📚 Chapter: Determination of Income and Employment

4 Arrange the procedural steps to identify the base autonomous consumption (C̄) geometrically.
Statements:
1. Plot the aggregate consumption function curve.
2. Locate the vertical axis (Y-axis).
3. Set national income to zero on the horizontal axis.
4. Read the intercept value where the curve meets the vertical axis.

A 1, 2, 3, 4

B 3, 2, 1, 4

C 4, 3, 2, 1

D 2, 4, 1, 3

💡 Short Explanation

Autonomous consumption is measured when income is zero. Locate the Y-axis after setting income to zero. The point where the consumption curve cuts the Y-axis represents C̄.

✅ Correct Answer Explanation

To identify Autonomous Consumption (C̄) on the graph: 1. Set national income to zero on the horizontal axis. 2. Locate the vertical (Y) axis, where income equals zero. 3. Observe the plotted consumption function. 4. Read the point where the consumption function intersects the Y-axis. This intercept represents Autonomous Consumption (C̄) because consumption still exists even when income is zero. Hence, the correct order is: 3 → 2 → 1 → 4 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the graph should first be interpreted at Y = 0 before identifying the intercept.
Option C) Incorrect because it starts with the final observation.
Option D) Incorrect because the intercept cannot be read before identifying income equal to zero.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the graphical steps in the order followed while identifying autonomous consumption from the consumption function.

Final Logic:

Income = 0 → Locate Y-axis → Observe Curve → Read Intercept, making Option B correct.

🧠 Memory Trick

"Zero Income → Y-axis → Intercept = C̄."

📚 Chapter: Determination of Income and Employment

5 If base consumption is Rs. 120, and the actual recorded total consumption is Rs. 400 when aggregate income is Rs. 400, what is the value of induced consumption?

A Rs. 280

B Rs. 120

C Rs. 400

D Rs. 0.70

💡 Short Explanation

Total consumption equals autonomous consumption plus induced consumption. Subtract autonomous consumption from total consumption. The remainder is induced consumption.

✅ Correct Answer Explanation

The consumption function is: C=C+cY Given: Total Consumption (C) = Rs. 400 Autonomous Consumption (C̄) = Rs. 120 Induced Consumption: =C-C=400-120=280 Therefore, the induced consumption is Rs. 280, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) Rs. 120 → Incorrect because this is autonomous consumption.
Option C) Rs. 400 → Incorrect because this is total consumption.
Option D) Rs. 0.70 → Incorrect because this is not a monetary value and does not represent induced consumption.

🎯 Strategy

Used

Substitution

Application:

Use the identity:
Total Consumption=Autonomous Consumption+Induced Consumption
and substitute the given values.

Final Logic:

400-120=280
Hence, Option A is correct.

🧠 Memory Trick

"Induced = Total − Auto."

📚 Chapter: Determination of Income and Employment

6 The magnitude of the variable (induced) component of consumption in the model depends directly on the current level of national income and the ________.

A Ex-post actual investment

B Marginal Propensity to Consume

C Autonomous base savings

D Average Propensity to Consume

💡 Short Explanation

Induced consumption is represented by cY. It depends on both income (Y) and MPC (c). Therefore, MPC directly determines the variable component.

✅ Correct Answer Explanation

The Keynesian consumption function is: C=C+cY The induced component is: cY Its magnitude depends on: National Income (Y), and Marginal Propensity to Consume (c). If either income or MPC changes, induced consumption also changes. Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Ex-post actual investment → Incorrect because investment is not a determinant of induced consumption.
Option C) Autonomous base savings → Incorrect because autonomous savings do not determine induced consumption.
Option D) Average Propensity to Consume → Incorrect because induced consumption depends on MPC, not APC.

🎯 Strategy

Used

Concept Identification

Application:

Identify the variables present in the induced consumption term cY.

Final Logic:

Since induced consumption equals c × Y, it depends on MPC and income, making Option B correct.

🧠 Memory Trick

"cY = MPC × Income."

📚 Chapter: Determination of Income and Employment

7 If a household's income increases from Rs. 2000 to Rs. 3000, and their consumption simultaneously increases from Rs. 1500 to Rs. 2100, what is the calculated MPC?

A 0.50

B 0.75

C 0.80

D 0.60

💡 Short Explanation

MPC measures the change in consumption for every unit change in income. Apply the formula MPC = ΔC / ΔY. Substitute the given values.

✅ Correct Answer Explanation

The formula for Marginal Propensity to Consume (MPC) is: MPC=ΔC/ΔY Given: Initial Income = Rs. 2000 Final Income = Rs. 3000 ΔY=3000-2000=1000 Initial Consumption = Rs. 1500 Final Consumption = Rs. 2100 ΔC=2100-1500=600 Therefore, MPC=600/1000=0.60 Hence, the correct answer is Option D.

❓ Why Other Options Are Incorrect

Option A) 0.50 → Incorrect because it underestimates the increase in consumption.
Option B) 0.75 → Incorrect because the calculation gives 0.60.
Option C) 0.80 → Incorrect because consumption does not increase by Rs.800.

🎯 Strategy

Used

Substitution

Application:

Calculate the changes in income and consumption, then substitute them into the MPC formula.

Final Logic:

MPC=600/1000=0.60
Therefore, Option D is correct.

🧠 Memory Trick

"MPC = Change in Consumption ÷ Change in Income."

📚 Chapter: Determination of Income and Employment

8 Match the hypothetical limits of MPC to their economic implications.

List I	List II
1. c = 0	a. Half of incremental income is saved
2. c = 1	b. Savings completely absorb the income change
3. c = 0.5	c. Always ≤ 1 and ≥ 0
4. c constraint	d. Zero addition to savings from income change

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

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

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

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

💡 Short Explanation

c = 0 means all additional income is saved. c = 1 means all additional income is consumed. c = 0.5 means income is equally divided between consumption and saving. MPC always lies between 0 and 1.

✅ Correct Answer Explanation

The correct matching is: 1. c = 0 → b. Savings completely absorb the income change 2. c = 1 → d. Zero addition to savings from income change 3. c = 0.5 → a. Half of incremental income is saved 4. c constraint → c. Always ≤ 1 and ≥ 0 Thus, the correct sequence is: 1-b, 2-d, 3-a, 4-c Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because c = 0 does not mean half the income is saved.
Option B) Incorrect because c = 1 does not imply half the income is consumed.
Option D) Incorrect because c = 0 does not imply zero saving.

🎯 Strategy

Used

Option Grouping

Application:

Recall the economic interpretation of special values of MPC and match them with their implications.

Final Logic:

Only Option C correctly matches all four concepts.

🧠 Memory Trick

"0 = Save All, 1 = Spend All, 0.5 = Split Half, MPC ∈ [0,1]."

📚 Chapter: Determination of Income and Employment

9 Which of the following describes the geometric shape of the consumption function curve if MPC = 0?
Statements:
1. It becomes a horizontal line parallel to the X-axis.
2. It becomes a 45-degree line originating from zero.

A Only Statement 2 is correct.

B Only Statement 1 is correct.

C Both Statements 1 and 2 are correct.

D Both Statements 1 and 2 are incorrect.

💡 Short Explanation

When MPC = 0, consumption does not change with income. Therefore, the consumption function becomes a horizontal line. A 45-degree line represents Consumption = Income, not MPC = 0.

✅ Correct Answer Explanation

If MPC = 0, the consumption function becomes: C=C Since consumption remains constant regardless of income, the graph is a horizontal line parallel to the X-axis. Statement 1 is therefore correct. Statement 2 is incorrect because a 45-degree line represents points where Consumption equals Income, not a situation where MPC equals zero. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Statement 2 is false.
Option C) Incorrect because Statement 2 is incorrect.
Option D) Incorrect because Statement 1 is correct.

🎯 Strategy

Used

Graph Interpretation

Application:

Visualize how the consumption function changes when the slope (MPC) becomes zero.

Final Logic:

A zero slope produces a horizontal line, making Option B correct.

🧠 Memory Trick

"MPC = 0 → Flat Consumption Line."

📚 Chapter: Determination of Income and Employment

10 Assertion (A): When MPC = 1, any increase in income leads to an equivalent absolute increase in savings.
Reason (R): The relation MPS = 1 – MPC dictates that if MPC = 1, then MPS = 0, meaning no portion of additional income is saved.

A Both true, R explains A

B Both false

C A true, R false

D A false, R true

💡 Short Explanation

MPC = 1 means all additional income is consumed. Therefore, additional saving is zero. The Assertion is false, while the Reason is true.

✅ Correct Answer Explanation

The Assertion is false because when MPC = 1, every additional unit of income is spent on consumption. There is no increase in savings. The Reason is true because: MPS=1-MPC If MPC=1, then MPS=1-1=0 This means none of the additional income is saved. Therefore, Option D is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the Assertion is false.
Option B) Incorrect because the Reason is true.
Option C) Incorrect because the Assertion is false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Evaluate the truth of both statements using the relationship between MPC and MPS.

Final Logic:

Since the Assertion is false and the Reason is true, Option D is correct.

🧠 Memory Trick

"MPC = 1 → Spend All, MPS = 0."

📚 Chapter: Determination of Income and Employment

11 Arrange the conceptual steps to accurately derive the savings function geometrically from the consumption diagram.
Statements:
1. Identify the break-even point where the consumption curve intersects the 45-degree line.
2. Draw the 45-degree reference line representing Y = C.
3. Plot the corresponding point for savings where S = 0 directly below the break-even point.
4. Draw the consumption function C = C̄ + cY.

A 2, 4, 1, 3

B 1, 3, 2, 4

C 4, 3, 2, 1

D 3, 1, 4, 2

💡 Short Explanation

Draw the 45-degree reference line first. Plot the consumption function. Locate the break-even point. Transfer it to the savings graph where savings become zero.

✅ Correct Answer Explanation

The savings function is derived from the consumption diagram through the following sequence: 1. Draw the 45-degree line (Y = C) as the reference line. 2. Draw the consumption function C=C+cY. 3. Locate the break-even point, where the consumption function intersects the 45-degree line. At this point, income equals consumption. 4. Project this point onto the savings graph, where Savings = 0. Thus, the correct sequence is: 2 → 4 → 1 → 3 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because the break-even point cannot be identified before drawing the graphs.
Option C) Incorrect because plotting the savings point is the final step.
Option D) Incorrect because the savings point cannot be plotted before constructing the graph.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the graphical procedure according to the order used in the NCERT derivation of the savings function.

Final Logic:

Reference Line → Consumption Curve → Break-even Point → Savings Graph, making Option A correct.

🧠 Memory Trick

"45° → Consumption → Break-even → Savings."

📚 Chapter: Determination of Income and Employment

12 By algebraically substituting the linear consumption function into S=Y-C, the savings function can be fully expressed as
S=-C+________.

A (1 + c)Y

B cY

C (1 − c)Y

D (c − 1)Y

💡 Short Explanation

Begin with the savings identity. Substitute the consumption function. Simplify the equation.

✅ Correct Answer Explanation

The savings identity is S=Y-C Substitute the consumption function C=C+cY Then, S=Y-(C+cY) Simplifying, S=-C+(1-c)Y Hence, the missing term is (1-c)Y Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the coefficient of income becomes 1 − c, not 1 + c.
Option B) Incorrect because the savings function is not simply cY.
Option D) Incorrect because (c − 1)Y gives the opposite sign.

🎯 Strategy

Used

Substitution

Application:

Substitute the consumption function into the savings identity and simplify algebraically.

Final Logic:

S=Y-(C+cY)=-C+(1-c)Y
Hence, Option C is correct.

🧠 Memory Trick

"Savings = Minus Auto + MPS × Income."

📚 Chapter: Determination of Income and Employment

13 Match the algebraic derivations demonstrating MPS=1-c.

List I	List II
1. Base Identity	a. ΔS = ΔY − ΔC
2. Change Application	b. S = Y − C
3. Ratio Calculation	d. ΔS / ΔY = ΔY / ΔY − ΔC / ΔY
4. Final Conclusion	c. MPS = 1 − MPC

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

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

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

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

💡 Short Explanation

Start with the savings identity. Apply changes to both sides. Divide by the change in income. Arrive at the relationship between MPS and MPC.

✅ Correct Answer Explanation

The derivation proceeds as follows: 1. Base Identity → b. S=Y-C 2. Change Application → a. ΔS=ΔY-ΔC 3. Ratio Calculation → d. ΔS/ΔY=ΔY/ΔY-ΔC/ΔY 4. Final Conclusion → c. MPS=1-MPC Thus, the correct matching is: 1-b, 2-a, 3-d, 4-c Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because the base identity and change application are interchanged.
Option B) Incorrect because the final conclusion is incorrectly matched.
Option D) Incorrect because the sequence of derivation is incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Match each mathematical step with its corresponding stage in the derivation of the MPS formula.

Final Logic:

Only Option C correctly follows the derivation from the savings identity to MPS = 1 − MPC.

🧠 Memory Trick

"Identity → Change → Divide → MPS."

📚 Chapter: Determination of Income and Employment

📄 Passage

"We define the marginal propensity to save (MPS) as the rate of change in savings as income increases. Since S=Y-C, ΔS=ΔY-ΔC. Dividing by ΔY, we get MPS=1-c. It implies that 1=s+c."

If an economy undergoes a structural change causing its Marginal Propensity to Save (MPS) to increase by exactly 0.15, what mathematically must happen to the Marginal Propensity to Consume (MPC)?

A It decreases by 0.15.

B It increases by 0.15.

C It remains unchanged.

D It decreases by 1.15.

💡 Short Explanation

MPC and MPS always sum to 1. If MPS increases, MPC must decrease by the same amount. Therefore, an increase of 0.15 in MPS reduces MPC by 0.15.

✅ Correct Answer Explanation

The relationship between the two propensities is: MPC+MPS=1 If MPS increases by 0.15, the total must still remain equal to 1. Therefore, MPC must decrease by exactly 0.15. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because both MPC and MPS cannot increase simultaneously while their sum remains 1.
Option C) Incorrect because any change in MPS necessarily changes MPC.
Option D) Incorrect because a decrease of 1.15 is mathematically impossible for MPC.

🎯 Strategy

Used

Concept Identification

Application:

Apply the identity:
MPC+MPS=1
to determine how one propensity changes when the other changes.

Final Logic:

Since the sum remains 1, an increase in MPS by 0.15 requires an equal decrease in MPC. Therefore, Option A is correct.

🧠 Memory Trick

"One Goes Up, the Other Goes Down."

📚 Chapter: Determination of Income and Employment

15 At the specific break-even level of income where consumption exactly equals income, what is the precise value of the Average Propensity to Consume (APC)?

A 0.5

B 1

C 0

D Infinity

💡 Short Explanation

At the break-even point, Consumption = Income. Therefore, APC=C/Y=1.

✅ Correct Answer Explanation

Average Propensity to Consume is defined as: APC=C/Y At the break-even point, C=Y Therefore, APC=Y/Y=1 At this income level, savings are zero because all income is consumed. Hence, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A) 0.5 → Incorrect because consumption equals income, not half of income.
Option C) 0 → Incorrect because consumption is not zero.
Option D) Infinity → Incorrect because APC equals exactly 1.

🎯 Strategy

Used

Formula Identification

Application:

Use the definition of APC and substitute the break-even condition.

Final Logic:

APC=Y/Y=1
Therefore, Option B is correct.

🧠 Memory Trick

"Break-even → Consume Everything → APC = 1."

📚 Chapter: Determination of Income and Employment

16 If an economy has an APC of 1.05 at a low income level, what is the value of the APS, and what macroeconomic state does it indicate?

A APS = 1.05; High Savings

B APS = 0; Break-even Point

C APS = 0.05; Positive Savings

D APS = −0.05; Dissavings Occurring

💡 Short Explanation

APS is calculated as: APS=1-APC Since APC exceeds 1, APS becomes negative. Negative APS indicates dissaving.

✅ Correct Answer Explanation

The relationship between APC and APS is: APC+APS=1 Given: APC=1.05 Therefore, APS=1-1.05=-0.05 A negative APS means households are consuming more than their income, financing consumption through borrowing or past savings. This situation is called dissaving. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because APS cannot exceed 1 in this situation.
Option B) Incorrect because break-even occurs when APS = 0 and APC = 1.
Option C) Incorrect because APS is negative, not positive.

🎯 Strategy

Used

Substitution

Application:

Apply the identity:
APS=1-APC
using the given APC.

Final Logic:

APS=-0.05
A negative APS indicates dissaving, making Option D correct.

🧠 Memory Trick

"APC Above One → APS Below Zero."

📚 Chapter: Determination of Income and Employment

17 Given the behavioral equation
C=120+0.6Y,
at what equilibrium level of income (Y) will aggregate savings equal zero (the break-even point)?

A 120

B 200

C 300

D 400

💡 Short Explanation

At the break-even point, Savings = 0. Therefore, Income = Consumption (Y = C). Substitute the consumption function and solve for Y.

✅ Correct Answer Explanation

At the break-even point, S=0 Since S=Y-C, it follows that Y=C. Given, C=120+0.6Y Substitute Y=C: Y=120+0.6YY-0.6Y=1200.4Y=120Y=120/0.4=300 Thus, the equilibrium (break-even) income is Rs. 300, making Option C the correct answer.

❓ Why Other Options Are Incorrect

Option A) 120 → Incorrect because this is autonomous consumption.
Option B) 200 → Incorrect because it does not satisfy the break-even condition.
Option D) 400 → Incorrect because at this income level, savings would be positive.

🎯 Strategy

Used

Substitution

Application:

Use the break-even condition Y = C, substitute the consumption function, and solve for income.

Final Logic:

Y=120+0.6YY=300
Therefore, Option C is correct.

🧠 Memory Trick

"Break-even → Income = Consumption."

📚 Chapter: Determination of Income and Employment

18 If an empirical study finds
C=250+0.8Y,
which statement strictly interprets the parameter 0.8?
Statements:
1. It signifies that exactly 80% of total national income is continuously consumed.
2. It mathematically implies that the autonomous multiplier 1/1-c is exactly 5.

A Both Statements 1 and 2 are incorrect.

B Only Statement 1 is correct.

C Both Statements 1 and 2 are correct.

D Only Statement 2 is correct.

💡 Short Explanation

0.8 is the Marginal Propensity to Consume (MPC). It measures the increase in consumption due to an increase in income. It also determines the value of the investment multiplier.

✅ Correct Answer Explanation

The consumption function is C=250+0.8Y. Here, c=0.8. Statement 1 is incorrect because 0.8 represents the Marginal Propensity to Consume, not the proportion of total income consumed. The ratio of total consumption to total income is Average Propensity to Consume (APC). Statement 2 is correct because the investment multiplier is k=1/1-c Substituting c=0.8, k=1/1-0.8=1/0.2=5. Hence, only Statement 2 is correct, making Option D the correct answer.

❓ Why Other Options Are Incorrect

Option A) Incorrect because Statement 2 is correct.
Option B) Incorrect because Statement 1 confuses MPC with APC.
Option C) Incorrect because Statement 1 is false.

🎯 Strategy

Used

Concept Identification

Application:

Differentiate between MPC and APC, and apply the multiplier formula.

Final Logic:

Since 0.8 is MPC and gives a multiplier of 5, Option D is correct.

🧠 Memory Trick

"Coefficient Gives MPC; Multiplier = 1 ÷ MPS."

📚 Chapter: Determination of Income and Employment

19 Match the average propensity allocation effects with their corresponding income phases.

List I	List II
1. Income below break-even	a. APC falls below 1, APS is positive
2. Income at break-even	b. APC > 1, APS is negative
3. Income above break-even	c. APC converges towards MPC
4. Income approaching infinity	d. APC = 1, APS = 0

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

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

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

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

💡 Short Explanation

Below break-even, consumption exceeds income. At break-even, consumption equals income. Above break-even, savings become positive. At very high income, APC approaches MPC.

✅ Correct Answer Explanation

The correct matching is: 1. Income below break-even → b. APC > 1, APS is negative 2. Income at break-even → d. APC = 1, APS = 0 3. Income above break-even → a. APC falls below 1, APS is positive 4. Income approaching infinity → c. APC converges towards MPC Thus, the correct sequence is: 1-b, 2-d, 3-a, 4-c Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Incorrect because below break-even APC is greater than 1, not below 1.
Option C) Incorrect because break-even is incorrectly matched.
Option D) Incorrect because income phases are mismatched.

🎯 Strategy

Used

Option Grouping

Application:

Relate APC and APS behaviour to different income levels relative to the break-even point.

Final Logic:

Only Option B correctly matches all four income phases.

🧠 Memory Trick

"Below Break-even: Borrow; Above Break-even: Save."

📚 Chapter: Determination of Income and Employment

20 Arrange the dynamic sequence of how income allocation variables change as national income steadily grows from zero.
Statements:
1. Aggregate savings become strictly positive (APS > 0).
2. Dissavings occur to cover base consumption (APS < 0).
3. Savings equal exactly zero (APS = 0).
4. APS continuously rises, asymptotically approaching MPS.

A 2, 3, 1, 4

B 1, 2, 3, 4

C 3, 4, 1, 2

D 4, 1, 2, 3

💡 Short Explanation

Initially, households dissave because autonomous consumption exceeds income. At the break-even point, savings become zero. Beyond break-even, savings turn positive. As income keeps rising, APS approaches MPS.

✅ Correct Answer Explanation

As income increases from zero: 1. Dissavings occur (APS < 0) because households consume more than their income. 2. Savings become zero (APS = 0) at the break-even income. 3. Savings become positive (APS > 0) once income exceeds the break-even level. 4. APS gradually approaches MPS as income continues to increase because the effect of autonomous consumption becomes negligible. Thus, the correct order is: 2 → 3 → 1 → 4 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) Incorrect because positive savings cannot occur before dissaving.
Option C) Incorrect because break-even is not the starting stage.
Option D) Incorrect because APS approaches MPS only after income becomes sufficiently large.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the stages of income allocation according to the behaviour of savings and average propensities as income rises.

Final Logic:

Dissaving → Break-even → Positive Saving → APS Approaches MPS, making Option A correct.

🧠 Memory Trick

"Borrow → Break-even → Save → Stabilise."

📚 Chapter: Determination of Income and Employment

CUET UG Economics Booster Test 3 - Consumption and Saving

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