# Free Income Determination 02 Practice Test - 12th Grade - Commerce

Multiplier is estimated as

A.

1MPC

B.

11MPC

C.

11+MPC

D.

11MPS

#### SOLUTION

Solution : B

Multiplier = 11MPC

If the marginal propensity to save decreases, the value of the multiplier will

A.

Increase

B.

Decrease

C.

Remain constant

D.

Decrease as much as the decrease in MPS

#### SOLUTION

Solution : A

If the marginal propensity to save decreases, the value of the multiplier will increase.

If investment increases from 400 to 600 and income increases from 3,000 to 4,000, the MPS should be equal to

A.

0.1

B.

0.2

C.

0.3

D.

0.4

#### SOLUTION

Solution : B

Multiplier (M) = ΔYΔA

= (40003000)(600400)

= 5

MPS = 1M

15

= 0.2

Saving can never be negative.

A.

True

B.

False

#### SOLUTION

Solution : B

False. Saving can be negative when consumption is greater than income. Negative saving amounts to borrowing.

MPC + MPS > 1.

A.

True

B.

False

#### SOLUTION

Solution : B

False. MPC + MPS = 1, it can never be greater than or less than 1.

There is a direct relationship between MPC and value of investment multiplier.

A.

True

B.

False

#### SOLUTION

Solution : A

True, there is a direct relationship between MPC and value of investment multiplier. Higher the value of MPC, higher the investment multiplier and vice cersa. Because,

M=11MPC

In an economy, 75 per cent of the increase in income is spent on consumption, Investment is increased by Rs 1,00 crore. Calculate :

(i) Total increase in income.

(ii) Total increase in consumption expenditure.

A.

(i) Rs 4,000 crore
(ii) Rs 3,000 crore

B.

(i) Rs 3,000 crore
(ii) Rs 3,000 crore

C.

(i) Rs 3,000 crore
(ii) Rs 4,000 crore

D.

(i) Rs 5,000 crore
(ii) Rs 3,000 crore

#### SOLUTION

Solution : A

(i) 75 per cent of the increase in income is spent on consumption.

MPC=ΔCΔY=75100=0.75

Multiplier  (M)=11MPC=110.75=10.25=4

We know,                M=ΔYΔI

ΔY=M×ΔI

ΔY=4×1,000=4,000

(ii) Increase in consumption expenditure (ΔC)=MPC.ΔY

=0.75×4,000                   (MPC=ΔCΔY), so that ΔC=MPC.ΔY)

=75100×4,000=3,000

(i) Total increase in income = Rs 4,000 crore.

(ii) Total increase in consumption expenditure = Rs 3,000 crore.

If autonomous expenditure by the government increases by Rs 5,000, find increase in equilibrium GDP when half of income is always spent on the purchase of goods for consumption.

A.

5,000

B.

10,000

C.

10,500

D.

0

#### SOLUTION

Solution : B

ΔY=11MPC.ΔA            [Where A is autonomous expenditure by the government]

=110.5×5,000=5,0000.5=10,000.

In an economy S = - 50 + 0.5Y is the saving function (where S = saving and Y = national income) and investment expenditure is 7,000. Calculate

(i) Equilibrium level of national income.

(ii) Consumption expenditure at equilibrium level of national income.

A.

(i) 12,100

(ii) 12,100

B.

(i) 12,100

(ii) 7,100

C.

(i) 7,100

(ii) 14,100

D.

(i) 14,100

(ii) 7,100

#### SOLUTION

Solution : D

(i) Given, S = - 50 + 0.5Y

and I = 7,000

At the equilibrium level,

S = I

-50 + 0.5Y = 7,000

0.5Y = 7,000 + 50

0.5Y = 7,050

Y=7,0500.5

Y = 14,100

(ii) At Y = 14,100

Saving, S = - 50 + 0.5(14,100)

= - 50 + 7,050

S = 7,000

Consumption expenditure, C = Y - S

=14,1007,000

=7,100

Alternative Method

At equilibrium level,

Saving = Investment

Saving = 7,000

Consumption expenditure, C =  Y - S

= 14,100 - 7,000

= 7,100.

(i) Equilibrium level of national income = 14,100.

(ii) Consumption expenditure at equilibrium level of national income = 7,100.

Given, the consumption function, C = 150 + 0.6Y, where C = consumption expenditure, Y = income and investment expenditure = Rs 2,000. Calculate:

(i) Equilibrium level of national income

(ii) Consumption at equilibrium level of national income

(iii) Saving at equilibrium level of national income

A.

(i) Rs 5,375

(ii) Rs 3,375

(iii) Rs 2,300

B.

(i) Rs 5,375

(ii) Rs 3,375

(iii) Rs 2,000

C.

(i) Rs 3,375

(ii) Rs 4,375

(iii) Rs 2,000

D.

(i) Rs 8,750

(ii) Rs 3,375

(iii) Rs 2,000

#### SOLUTION

Solution : B

(i) Given, C = 150 + 0.6Y and I = 2,000

At the equilibrium level,

Y = C + I

Y = 150 + 0.6Y + 2,000                     Y = 2,150 + 0.6Y

Y - 0.6Y = 2,150                    0.4Y = 2,150

Y=2,1500.4=5,375

(ii) Consumption,        C = 150 +0.6(5,375)

= 150 + 3,225 = 3,375

(iii) We know that,       Y = C + S

S = Y - C = 5,375 - 3,375 = 2,000

Alternatively,

Given :                         C = 150 + 0.6Y,

S = -150 + 0.4Y ( MPC = 0.6, accordingly MPS = 1 - 0.6 = 0.4)

Or,                                S = -150 + 0.4(5,375)

= -150 + 2,150 = 2,000.

(i) Equilibrium level of national income = Rs 5,375.

(ii) Consumption expenditure at equilibrium level of national income = Rs 3,375.

(iii) Saving at equilibrium level of national income = Rs 2,000.