# Free Income Determination 01 Practice Test - 12th Grade - Commerce

If MPC = 0.9, then value of multiplier will be :

A.

6

B.

9

C.

10

D.

12

#### SOLUTION

Solution : C

Multiplier = 11MPC

110.9

= 10

When C = 100 + 0.5Y and Y = 1,000, autonomous consumption will be:

A.

100

B.

1,000

C.

500

D.

600

#### SOLUTION

Solution : A

Autonomous consumption is the consumption which does not depend on income. In the given equation, when Y is zero, C = 100. Autonomous consumption is 100.

If entire additional income is converted into additional consumption, the value of multiplier will be

A.

2

B.

0

C.

1

D.

#### SOLUTION

Solution : D

Multiplier = 11MPC

If entire additional income is converted into additional consumption, MPC = 1.

Therefore, the value of multiplier will be infinity.

The value of marginal propensity to save is always positive.

A.

True

B.

False

#### SOLUTION

Solution : A

True. Marginal propensity to save is the ratio between additional saving and additional income which is always positive because of positive relationship between saving and income.

Find consumption when ¯C=100, MPC = 0.5 and Y = 2,000. Is there is greater increase in income as compared to consumption when income changes to 2,500?

A.

Consumption = 1,350
Yes

B.

Consumption = 1,350
No

C.

Consumption = 1,150
No

D.

Consumption = 1,150
Yes

#### SOLUTION

Solution : A

We know that,

C=¯C+MPC(Y)

When Y = 2,000,     C=100+0.5(2,000)

=100+1,000

=1,100

We also know  that,

Y = C + S

Or,                             S = Y - C

= 2,000 - 1,100 = 900

Consumption = 1,100

Saving = 900

When Y = 2,500

C = 100 + 0.5(2,500)

= 100 + 1,250 = 1,350

Change in C = 1,350 - 1,100 = 250

Change in Y = 2,500 - 2,000 = 500

Yes, income is greater than the increase in consumption when Y increases from 2,000 to 2,500.

Find C at equilibrium Y when Y = 6,000 AND C = 100 + 0.75Y.

A.

4,500

B.

4,600

C.

5,000

D.

3,900

#### SOLUTION

Solution : B

Given,             C = 100 + 0.75Y

OR,                 C = 100 + 0.75(6,000)

=100+75100×6,000

= 100 + 4,500 = 4,600.

In an economy, the government makes some additional investment. Find its value when MPC = 0.5 and increase in income = Rs 1,000.

A.

Rs 500

B.

Rs 1,000

C.

Rs 1,500

D.

Rs 100

#### SOLUTION

Solution : A

We know,

M (multiplier) =ΔYΔI

We also know that,   K=11MPC

Substituting the value of MPC, K=110.5=10.5=2

We know, K=ΔYΔI and ΔY=1,000

Thus,                 1,000ΔI=2

ΔI=1,0002=500

Additional investment by the government = Rs 500.

If aggregate demand increases, aggregate supply will increase only when there is(are)

A.

Excess capacity

B.

Under utilisation of the existing resources

C.

Over utilisation of the existing resources

D.

Both A and B

#### SOLUTION

Solution : D

If aggregate demand increases, aggregate supply will increase only when there are an excess capacity and under-utilisation of the existing resources.

If the value of the multiplier is 4, what will be the effect on the income of an economy if investment increases by Rs 100 crore?

A.

Income will not change

B.

Income will decrease by Rs 400 crore

C.

Income will increase by Rs 400 crore

D.

Income will increase by Rs 500 crore

#### SOLUTION

Solution : C

Income will increase by Rs 400 crore.

Output always increases when AD increases.

A.

True

B.

False

#### SOLUTION

Solution : B

False. In response to increase in AD, output increases only till full employment equilibrium is struck in the economy.