CUET UG Economics Booster Test 3 - Foundations of Income Determination -

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CUET UG Economics Booster Test 3 - Foundations of Income Determination

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Economics Booster Test 3 - Foundations of Income Determination

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QUESTION 1 OF 20

Which of the following statements about aggregate macro variables are correct?
Statements:
1. Aggregate demand can exceed actual planned output, leading to unintended inventory depletion.
2. Ex ante supply is always equal to ex post supply.
3. Macroeconomic equilibrium requires that the plans of suppliers are matched by plans of those who provide final demands.

Answer Review

1 Which of the following statements about aggregate macro variables are correct?
Statements:
1. Aggregate demand can exceed actual planned output, leading to unintended inventory depletion.
2. Ex ante supply is always equal to ex post supply.
3. Macroeconomic equilibrium requires that the plans of suppliers are matched by plans of those who provide final demands.

A 1 and 2

B 2 and 3

C 1 and 3

D 1, 2, and 3

💡 Short Explanation

Aggregate demand exceeding planned output results in unintended inventory depletion. Ex ante supply and ex post supply are not always equal. Macroeconomic equilibrium exists when planned supply equals planned demand.

✅ Correct Answer Explanation

Statement 1 is correct because when planned aggregate demand exceeds planned output, producers meet the excess demand by selling goods from inventories, causing unintended inventory depletion. Statement 2 is incorrect because ex ante (planned) supply and ex post (actual) supply may differ due to unexpected changes in demand and inventory adjustments. Statement 3 is correct because macroeconomic equilibrium is achieved when the plans of producers (supply) match the planned expenditure (aggregate demand) of households and firms. Therefore, Statements 1 and 3 are correct, making Option C the correct answer.

❓ Why Other Options Are Incorrect

Option A) 1 and 2 → Incorrect because Statement 2 is false.
Option B) 2 and 3 → Incorrect because Statement 2 is false.
Option D) 1, 2, and 3 → Incorrect because Statement 2 is incorrect.

🎯 Strategy

Used

Elimination

Application:

Evaluate each statement independently and eliminate options containing the incorrect statement.

Final Logic:

Only Statements 1 and 3 are correct; therefore, Option C is the correct answer.

🧠 Memory Trick

"Demand > Output → Inventory Down."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Macroeconomic Equilibrium and Inventory Adjustment

2 Match the following advanced concepts derived from macroeconomic modeling.

List I	List II
1. Investment Multiplier	a. Aggregate output is determined solely by the level of aggregate demand
2. Paradox of Thrift	b. Equilibrium output is less than full employment
3. Effective Demand Principle	c. Ratio of total increment in output to initial increment in autonomous expenditure
4. Deficient Demand	d. Increase in MPS leads to unchanged or lower total savings

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

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

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

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

💡 Short Explanation

Investment Multiplier measures the increase in income due to autonomous expenditure. Paradox of Thrift explains why higher saving may not increase total savings. Effective Demand Principle states that aggregate demand determines output. Deficient demand results in output below full employment.

✅ Correct Answer Explanation

The correct matching is: 1. Investment Multiplier → c. Ratio of total increment in output to initial increment in autonomous expenditure 2. Paradox of Thrift → d. Increase in MPS leads to unchanged or lower total savings 3. Effective Demand Principle → a. Aggregate output is determined solely by the level of aggregate demand 4. Deficient Demand → b. Equilibrium output is less than full employment Therefore, the correct matching is 1-c, 2-d, 3-a, 4-b, making Option C correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect because Investment Multiplier and the remaining concepts are mismatched.
Option B → Incorrect because Effective Demand Principle and Investment Multiplier are interchanged.
Option D → Incorrect because all four concepts are incorrectly matched.

🎯 Strategy

Used

Option Grouping

Application:

Recall the standard NCERT definition of each macroeconomic concept and match it with the appropriate description.

Final Logic:

Only Option C correctly matches all four concepts.

🧠 Memory Trick

"Multiplier–Increase, Thrift–Saving, Demand–Output, Deficient–Unemployment."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Multiplier, Effective Demand and Paradox of Thrift

3 Which of the following best represents a violation of the ceteris paribus assumption in deriving the simple Keynesian multiplier discussed in Chapter 4?

A Holding government spending at zero

B Keeping the price level constant

C Treating investment as autonomous

D Allowing the rate of interest and prices to fluctuate simultaneously while determining the multiplier

💡 Short Explanation

The simple Keynesian multiplier assumes other variables remain constant. Prices and interest rates are held fixed during derivation. Allowing both to vary violates the ceteris paribus assumption.

✅ Correct Answer Explanation

The derivation of the simple Keynesian multiplier relies on the ceteris paribus assumption, where important variables such as the price level, interest rate, and planned investment are kept constant. If both the interest rate and prices are allowed to fluctuate simultaneously, changes in income would no longer depend solely on autonomous expenditure, and the multiplier formula would not hold in its simplified form. Therefore, Option D correctly represents a violation of the ceteris paribus assumption.

❓ Why Other Options Are Incorrect

Option A) Holding government spending at zero → Incorrect because excluding the government sector is a simplifying assumption of the two-sector model.
Option B) Keeping the price level constant → Incorrect because this is one of the assumptions of the simple Keynesian model.
Option C) Treating investment as autonomous → Incorrect because autonomous investment is another simplifying assumption used while deriving the multiplier.

🎯 Strategy

Used

Elimination

Application:

Identify which option breaks the simplifying assumptions used in deriving the Keynesian multiplier.

Final Logic:

Only Option D allows key variables to change simultaneously, violating the ceteris paribus assumption.

🧠 Memory Trick

"CP Broken = Prices + Interest Move Together."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Ceteris Paribus and Keynesian Multiplier Assumptions

4 Assertion (A): While determining the value of a particular variable, holding other variables constant helps isolate the specific relationship.
Reason (R): If the price level and interest rates were allowed to vary, the investment multiplier formula = 1/(1 − c) would not hold exactly as derived in the simple model.

A Both true, R explains A

B Both true, R does not explain A

C A true, R false

D Both false

💡 Short Explanation

Economic models isolate one relationship at a time. Holding other variables constant simplifies analysis. Changing prices and interest rates alters the assumptions behind the simple multiplier.

✅ Correct Answer Explanation

The Assertion is true because economists use the ceteris paribus assumption to study the relationship between selected variables while keeping all other influencing factors constant. This makes theoretical analysis manageable. The Reason is also true because the simple Keynesian multiplier, Multiplier=1/1-c, is derived under assumptions such as constant prices, fixed interest rate, and autonomous investment. If prices and interest rates were allowed to vary simultaneously, investment and aggregate demand would also change, causing the simple multiplier formula to no longer hold exactly. Therefore, the Reason correctly explains the Assertion, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) Both true, R does not explain A → Incorrect because the Reason directly explains why economists hold other variables constant.
Option C) A true, R false → Incorrect because the Reason is also true.
Option D) Both false → Incorrect because both the Assertion and the Reason are true.

🎯 Strategy

Used

Cause-and-Effect Analysis

Application:

Determine whether the Reason provides the theoretical justification for using the ceteris paribus assumption.

Final Logic:

Since changing prices and interest rates would alter the multiplier derivation, the Reason correctly explains the Assertion, making Option A correct.

🧠 Memory Trick

"Multiplier Works When Others Don't Work!" (Keep other variables fixed.)

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

📄 Passage

"If ex ante demand for final goods falls short of the output of final goods that the producers have planned to produce in a given year, equation Y = Ā + cY will not hold. Stocks will be piling up in the warehouses which we may consider as unintended accumulation of inventories."

Under the Keynesian framework, how do producers restore equilibrium in the next round if there is an unintended accumulation of inventories?

A They cut the value of production

B They increase prices

C They increase output

D They hire more labor

💡 Short Explanation

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

✅ Correct Answer Explanation

When planned aggregate demand is less than planned output, firms cannot sell all the goods they produce. The unsold goods accumulate as unintended inventories. To eliminate this excess stock, producers respond by reducing production in the next period until planned output equals planned demand. This adjustment restores macroeconomic equilibrium. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Option B) They increase prices → Incorrect because the simple Keynesian model assumes a fixed price level in the short run.
Option C) They increase output → Incorrect because higher output would further increase unwanted inventories.
Option D) They hire more labor → Incorrect because firms generally reduce production and employment when inventories accumulate.

🎯 Strategy

Used

Cause-and-Effect Analysis

Application:

Relate unintended inventory accumulation to the producer's adjustment mechanism in the Keynesian model.

Final Logic:

Excess inventories lead producers to reduce production, making Option A correct.

🧠 Memory Trick

"Inventory Up → Production Down."

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

📄 Passage

Based on the previous passage, what does unintended accumulation of inventories represent in terms of the short-run accounting identity?

A Negative ex post investment

B Positive unplanned inventory investment

C Decrease in autonomous consumption

D Rise in ex ante demand

💡 Short Explanation

Unsold goods become inventories. Inventory accumulation is counted as investment. Since it was not planned, it is an unplanned (unintended) inventory investment.

✅ Correct Answer Explanation

When firms produce more goods than are demanded, the unsold output is added to inventories. In national income accounting, changes in inventories are treated as investment. Because this increase in inventories was not planned, it is called positive unplanned inventory investment. Thus, the actual (ex post) investment becomes higher than the planned (ex ante) investment. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Negative ex post investment → Incorrect because inventories increase rather than decrease.
Option C) Decrease in autonomous consumption → Incorrect because autonomous consumption is unrelated to inventory accumulation.
Option D) Rise in ex ante demand → Incorrect because the passage states that planned demand falls short of planned output.

🎯 Strategy

Used

Concept Identification

Application:

Recognize that inventory changes are treated as investment in national income accounting and identify whether the change is planned or unplanned.

Final Logic:

Since unsold goods increase inventories, they are recorded as positive unplanned inventory investment, making Option B the correct answer.

🧠 Memory Trick

"Unsold Goods = Unplanned Investment."

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

7 The justification for taking the price level as fixed is that the economy has ______ and the law of ______ will not apply.

A full employment; constant returns

B excess demand; diminishing returns

C flexible wages; increasing returns

D unused resources; diminishing returns

💡 Short Explanation

The Keynesian short-run model assumes the economy has idle resources. Firms can increase production without higher marginal costs. Therefore, the law of diminishing returns does not operate immediately.

✅ Correct Answer Explanation

The Keynesian short-run model assumes that the economy has unused resources, such as unemployed labour and idle machinery. Because these resources are readily available, firms can increase output without experiencing the law of diminishing returns. As a result, production expands while the price level remains fixed. This assumption simplifies the analysis of equilibrium income determination. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) full employment; constant returns → Incorrect because at full employment, resources are fully utilized and the fixed-price assumption no longer holds.
Option B) excess demand; diminishing returns → Incorrect because excess demand is not the reason for assuming fixed prices.
Option C) flexible wages; increasing returns → Incorrect because wage flexibility and increasing returns are not the assumptions used in the basic Keynesian model.

🎯 Strategy

Used

Concept Identification

Application:

Recall the assumptions of the Keynesian fixed-price model regarding resource availability and production costs.

Final Logic:

Since the model assumes unused resources and the law of diminishing returns does not immediately apply, Option D is correct.

🧠 Memory Trick

"Unused Resources → Fixed Prices."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Fixed Price Assumption

8 We assumed investment to be autonomous. However, in reality, investment depends on variables like the availability of credit and the ______, which represents the cost of investible funds.

A exchange rate

B marginal propensity to save

C interest rate

D tax rate

💡 Short Explanation

Investment is assumed autonomous only in the simplified model. In reality, borrowing costs influence investment decisions. The interest rate represents the cost of investible funds.

✅ Correct Answer Explanation

In the simplified Keynesian model, investment is assumed to be autonomous (Ī) for analytical convenience. However, in reality, firms make investment decisions based on factors such as availability of credit, business expectations, and especially the interest rate, which is the cost of borrowing investible funds. A higher interest rate discourages investment, while a lower interest rate encourages it. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A) exchange rate → Incorrect because exchange rates mainly affect international trade and foreign investment rather than the direct cost of borrowing.
Option B) marginal propensity to save → Incorrect because MPS determines saving behaviour, not the borrowing cost for investment.
Option D) tax rate → Incorrect because taxes influence profits but do not directly represent the cost of investible funds.

🎯 Strategy

Used

Concept Identification

Application:

Identify the economic variable that directly represents the cost of borrowing funds for investment.

Final Logic:

The interest rate measures the cost of investible funds, making Option C correct.

🧠 Memory Trick

"Interest ↑ → Investment ↓."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Autonomous Investment and Interest Rate

9 If a country has a consumption function C = 40 + 0.8Y and autonomous investment I = 10, what is the planned (ex ante) aggregate demand when Y = 300?

A 290

B 300

C 310

D 280

💡 Short Explanation

Aggregate Demand = Consumption + Investment. Calculate consumption using the given income. Add autonomous investment to obtain planned aggregate demand.

✅ Correct Answer Explanation

Given: Consumption Function: C=40+0.8Y Investment: I=10 Income: Y=300 First, calculate consumption: C=40+0.8(300)C=40+240=280 Aggregate Demand: AD=C+IAD=280+10=290 Therefore, the planned (ex ante) Aggregate Demand is 290, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) 300 → Incorrect because it represents income, not aggregate demand.
Option C) 310 → Incorrect due to incorrect addition.
Option D) 280 → Incorrect because it includes only consumption and ignores investment.

🎯 Strategy

Used

Substitution

Application:

Substitute the given value of income into the consumption function and then add autonomous investment.

Final Logic:

AD = 280 + 10 = 290, making Option A correct.

🧠 Memory Trick

"AD = C + I (Always)."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Aggregate Demand Function

10 Following the previous question, if planned aggregate demand is 290 but the actual planned output produced (Y) is 300, what happens to the actual (ex post) inventory?

A Depletion of 10

B Accumulation of 10

C Depletion of 20

D No change in inventory

💡 Short Explanation

Planned output exceeds planned demand. Unsold goods are added to inventories. The increase equals the difference between output and demand.

✅ Correct Answer Explanation

From the previous question: Planned Aggregate Demand = 290 Actual Planned Output = 300 Since producers have produced 10 units more than planned demand, 300-290=10 these unsold goods are added to inventories. This represents unintended (unplanned) inventory accumulation, which is recorded as positive ex post inventory investment. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) Depletion of 10 → Incorrect because inventories decrease only when demand exceeds output.
Option C) Depletion of 20 → Incorrect because both the direction and magnitude are incorrect.
Option D) No change in inventory → Incorrect because output and demand are not equal.

🎯 Strategy

Used

Substitution

Application:

Compare planned output with planned aggregate demand and compute the inventory change as the difference.

Final Logic:

Since Output (300) > Demand (290), inventories increase by 10, making Option B the correct answer.

🧠 Memory Trick

"Output > Demand = Inventory Up."

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

11 In the multiplier mechanism, when income goes up by 10, and people spend 0.8 fraction of their additional income on consumption, the income of the economy in the next production cycle goes up by _____.

A 10

B 8

C 6.4

D 0.8

💡 Short Explanation

Additional income generates additional consumption. The increase in consumption equals MPC × Increase in Income. Here, 0.8 × 10 = 8.

✅ Correct Answer Explanation

In the Keynesian multiplier process, each increase in income induces additional consumption according to the Marginal Propensity to Consume (MPC). Given: Increase in Income = 10 MPC = 0.8 Additional Consumption: 0.8×10=8 This ₹8 becomes the income of producers in the next production cycle, initiating the next round of the multiplier process. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) 10 → Incorrect because not all additional income is spent; some is saved.
Option C) 6.4 → Incorrect because this is the second-round increase (0.8 × 8), not the next production cycle.
Option D) 0.8 → Incorrect because 0.8 is the MPC, not the increase in income.

🎯 Strategy

Used

Substitution

Application:

Multiply the increase in income by the MPC to determine the increase in consumption during the next production cycle.

Final Logic:

0.8 × 10 = 8, so Option B is correct.

🧠 Memory Trick

"Next Income = MPC × Previous Income."

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

12 If the investment multiplier of the economy is 5, what is the value of the marginal propensity to save (MPS)?

A 0.8

B 0.5

C 0.25

D 0.2

💡 Short Explanation

Multiplier = 1 / MPS Rearranging gives MPS = 1 / Multiplier. Therefore, 1/5 = 0.2.

✅ Correct Answer Explanation

The investment multiplier is given by k=1/1-c Since 1-c=MPS, the formula becomes k=1/MPS Given: k=5 Therefore, MPS=1/5=0.2 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) 0.8 → Incorrect because it represents the MPC, not the MPS.
Option B) 0.5 → Incorrect because it would give a multiplier of 2.
Option C) 0.25 → Incorrect because it corresponds to a multiplier of 4.

🎯 Strategy

Used

Substitution

Application:

Use the multiplier formula and substitute the given multiplier value.

Final Logic:

Since MPS = 1/5 = 0.2, Option D is correct.

🧠 Memory Trick

"Multiplier × MPS = 1."

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

13 Arrange the sequence of events of the "Paradox of Thrift" when people suddenly become more conservative about their expenditures.
Statements:
1. Producers cut production to restore equilibrium, leading to a fall in factor payments (income).
2. People decide to save a higher proportion of their income (MPC drops).
3. Aggregate demand decreases, creating an excess supply in the economy.
4. Total value of savings remains unchanged or declines at the new, lower equilibrium income.

A 1, 2, 3, 4

B 2, 3, 1, 4

C 2, 1, 3, 4

D 3, 4, 1, 2

💡 Short Explanation

Higher saving reduces consumption. Lower consumption decreases aggregate demand. Firms reduce production and income falls. Total savings may remain unchanged or even decrease.

✅ Correct Answer Explanation

The Paradox of Thrift explains that although individuals attempt to save more, the economy may not experience an increase in total savings. The correct sequence is: 1. People decide to save a higher proportion of income (MPC falls). 2. Consumption falls, reducing Aggregate Demand and creating excess supply. 3. Producers reduce production, causing income and employment to decline. 4. At the new lower equilibrium income, total savings remain unchanged or may even decrease. Thus, the correct order is: 2 → 3 → 1 → 4 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A) 1, 2, 3, 4 → Incorrect because production falls only after aggregate demand declines.
Option C) 2, 1, 3, 4 → Incorrect because producers cannot reduce production before excess supply develops.
Option D) 3, 4, 1, 2 → Incorrect because it reverses the actual economic sequence.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange the events according to the Keynesian explanation of the Paradox of Thrift.

Final Logic:

The logical sequence is:
Higher Saving → Lower Demand → Lower Production → Lower Income, making Option B correct.

🧠 Memory Trick

"Save More → Spend Less → Earn Less."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Paradox of Thrift

14 Graphically, how is autonomous investment represented in the two-sector model?

A A vertical line

B A downward sloping curve

C An upward sloping 45-degree line

D A horizontal line parallel to the income axis

💡 Short Explanation

Autonomous investment is independent of income. Its value remains constant at every level of income. Therefore, it is represented by a horizontal line on the graph.

✅ Correct Answer Explanation

In the two-sector Keynesian model, autonomous investment (Ī) does not vary with changes in national income. Since its value remains constant regardless of the level of income, it is graphically represented by a horizontal line parallel to the income (X) axis. This illustrates that planned investment is fixed throughout the analysis. Hence, Option D is the correct answer.

❓ Why Other Options Are Incorrect

Option A) A vertical line → Incorrect because a vertical line represents a constant value on the horizontal axis, not constant investment.
Option B) A downward sloping curve → Incorrect because autonomous investment does not decrease with income.
Option C) An upward sloping 45-degree line → Incorrect because the 45-degree line represents Aggregate Supply (Y = Output), not investment.

🎯 Strategy

Used

Concept Identification

Application:

Recall the graphical representation of autonomous investment in the Keynesian model.

Final Logic:

Since autonomous investment remains constant at every income level, it is represented by a horizontal line, making Option D correct.

🧠 Memory Trick

"Autonomous = Always Flat."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Autonomous Investment Curve

15 In a situation of deficient demand:
Statements:
1. The equilibrium level of output is less than the full employment level.
2. It leads to a decline in prices in the long run.
3. There is an unintended depletion of inventories.

A 1 and 2

B 1 and 3

C 2 and 3

D 1, 2, and 3

💡 Short Explanation

Deficient demand results in output below full employment. In the long run, weak demand puts downward pressure on prices. Deficient demand causes inventory accumulation, not depletion.

✅ Correct Answer Explanation

Statement 1 is correct because deficient aggregate demand causes firms to produce less than the full employment level of output. Statement 2 is also correct. If deficient demand persists in the long run, producers are likely to reduce prices to encourage sales, leading to a decline in the general price level. Statement 3 is incorrect because when demand is lower than planned production, unsold goods accumulate in inventories. Inventory depletion occurs when demand exceeds production, not when demand is deficient. Therefore, Statements 1 and 2 are correct, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) 1 and 3 → Incorrect because Statement 3 is false.
Option C) 2 and 3 → Incorrect because Statement 3 is false.
Option D) 1, 2, and 3 → Incorrect because Statement 3 is incorrect.

🎯 Strategy

Used

Elimination

Application:

Evaluate each statement separately and remove options containing the incorrect statement.

Final Logic:

Only Statements 1 and 2 are correct; therefore, Option A is the correct answer.

🧠 Memory Trick

"Low Demand → Low Output → Inventory Up."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Deficient Demand and Unemployment

16 What graphically indicates the emergence of excess demand in the final goods market when an initial increment in autonomous expenditure takes place?

A Aggregate demand shifts downwards

B The new ex ante AD line intersects the 45 degree line at a higher level of GDP

C The 45 degree line shifts upwards

D The consumption curve becomes horizontal

💡 Short Explanation

An increase in autonomous expenditure shifts the Aggregate Demand curve upward. A new equilibrium is established where the shifted AD curve meets the 45-degree line. The economy moves to a higher equilibrium level of output.

✅ Correct Answer Explanation

When autonomous expenditure (such as autonomous consumption or investment) increases, the Aggregate Demand (AD) curve shifts upward in a parallel manner. The new AD curve intersects the 45-degree line at a higher level of GDP, indicating a new equilibrium with higher output and income. This graphical movement reflects the multiplier process initiated by increased autonomous expenditure. Therefore, Option B is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Aggregate demand shifts downwards → Incorrect because an increase in autonomous expenditure shifts the AD curve upward.
Option C) The 45 degree line shifts upwards → Incorrect because the 45-degree line (Aggregate Supply) remains unchanged.
Option D) The consumption curve becomes horizontal → Incorrect because the consumption function continues to slope upward according to the MPC.

🎯 Strategy

Used

Graph Interpretation

Application:

Recall how an increase in autonomous expenditure affects the Keynesian Cross diagram.

Final Logic:

An increase in autonomous expenditure shifts the AD curve upward, creating a new intersection with the 45-degree line at a higher GDP, making Option B correct.

🧠 Memory Trick

"AD Up → GDP Up."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Keynesian Cross and Autonomous Expenditure Shift

17 Assertion (A): Without government taxes and subsidies, GDP becomes identically equal to National Income.
Reason (R): Government expenditure on final goods (G) is ignored because it fundamentally and qualitatively changes the simple multiplier analysis.

A Both true, R explains A

B Both false

C A true, R false

D A false, R true

💡 Short Explanation

The simplified two-sector model equates GDP with National Income. This is because indirect taxes and subsidies are ignored. Government expenditure is omitted only to simplify the model, not because it fundamentally changes the multiplier concept.

✅ Correct Answer Explanation

The Assertion is true because, in the simplified two-sector Keynesian model, indirect taxes and subsidies are ignored, allowing GDP to be treated as National Income. This simplification avoids the distinction between market prices and factor cost. The Reason is false because Government Expenditure (G) is excluded only to simplify the analysis and develop the basic multiplier model. Including government expenditure extends the model to a three-sector economy but does not fundamentally or qualitatively invalidate the multiplier mechanism. Hence, the Reason does not correctly explain the Assertion. Therefore, Option C is the correct answer.

❓ Why Other Options Are Incorrect

Option A) Both true, R explains A → Incorrect because the Reason is false.
Option B) Both false → Incorrect because the Assertion is true.
Option D) A false, R true → Incorrect because the Assertion is true while the Reason is false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Evaluate the truth of the Assertion and the Reason independently before checking whether the Reason correctly explains the Assertion.

Final Logic:

The Assertion is true, but the Reason is false; therefore, Option C is correct.

🧠 Memory Trick

"No Taxes → GDP = NI; No G → Simpler Model."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Simplified Two-Sector Model

18 When autonomous expenditure changes, the AD line shifts in parallel upwards or downwards. However, when MPC changes, the AD line ______ up or down.

A disappears

B becomes vertical

C bends

D swings

💡 Short Explanation

Autonomous expenditure changes the intercept of the AD curve. MPC changes the slope of the AD curve. Therefore, the AD curve rotates (swings) rather than shifting parallel.

✅ Correct Answer Explanation

The Aggregate Demand (AD) function is: AD=A+cY where: Ā determines the intercept. c (MPC) determines the slope. A change in autonomous expenditure (Ā) shifts the entire AD line parallel upward or downward. However, when MPC changes, the slope of the AD line changes. Instead of shifting parallel, the AD line rotates (swings) about its intercept. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A) disappears → Incorrect because the AD curve always exists.
Option B) becomes vertical → Incorrect because the AD function never becomes vertical in the Keynesian model.
Option C) bends → Incorrect because the AD function remains a straight line; it rotates rather than bends.

🎯 Strategy

Used

Graph Interpretation

Application:

Differentiate between a change in the intercept (parallel shift) and a change in the slope (rotation).

Final Logic:

Since MPC changes the slope, the AD line swings, making Option D correct.

🧠 Memory Trick

"Ā Shifts, MPC Swings."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Aggregate Demand Curve

19 If total autonomous expenditure Ā = 50 and the marginal propensity to consume c = 0.5, what is the new equilibrium value of output (Y)?

A 100

B 250

C 50

D 200

💡 Short Explanation

Equilibrium income is calculated using: Y=A/1-c Substitute the given values. Compute the equilibrium output.

✅ Correct Answer Explanation

Given: Ā = 50 c = 0.5 The equilibrium output is Y=A/1-c Substituting the values, Y=50/1-0.5Y=50/0.5=100 Therefore, the equilibrium value of output is 100, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B) 250 → Incorrect because it results from an incorrect calculation.
Option C) 50 → Incorrect because it ignores the multiplier effect.
Option D) 200 → Incorrect because the multiplier is 2, not 4.

🎯 Strategy

Used

Substitution

Application:

Apply the equilibrium income formula by substituting the given values.

Final Logic:

Y=50/0.5=100
Hence, Option A is correct.

🧠 Memory Trick

"Equilibrium = Autonomous ÷ MPS."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Equilibrium Income Formula

20 Match the following:

List I	List II
1. Y = C̄ + Ī + cY	a. Investment Multiplier
2. C = C̄ + cY	b. Equilibrium condition equation
3. Y − C	c. Consumption function
4. 1 / (1 − c)	d. Savings

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

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

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

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

💡 Short Explanation

The first equation represents equilibrium. The second is the consumption function. Savings equal income minus consumption. The last expression is the investment multiplier.

✅ Correct Answer Explanation

The correct matching is: 1. Y=C+I+cY→ b. Equilibrium condition equation 2. C=C+cY→ c. Consumption function 3. Y-C→ d. Savings 4. 1/1-c→ a. Investment Multiplier Thus, the correct sequence is: 1-b, 2-c, 3-d, 4-a Hence, Option C is the correct answer.

❓ Why Other Options Are Incorrect

Option A → Incorrect because the equations are mismatched with their definitions.
Option B → Incorrect because the consumption function and multiplier are incorrectly paired.
Option D → Incorrect because equilibrium and multiplier are interchanged.

🎯 Strategy

Used

Option Grouping

Application:

Identify each equation using its standard NCERT definition before matching it with the appropriate concept.

Final Logic:

Only Option C correctly matches all four equations and concepts.

🧠 Memory Trick

"Equilibrium–Consumption–Savings–Multiplier (ECSM)."

📚 Class XII – Introductory Macroeconomics – Chapter: Determination of Income and Employment – Topic: Consumption Function, Savings and Investment Multiplier

CUET UG Economics Booster Test 3 - Foundations of Income Determination

Test Complete!

Answer Review