# Free Income Determination 03 Practice Test - 12th Grade - Commerce

### Question 1

If MPS is 0.6, what will be ΔS when income increases by Rs 100?

Rs 60

Rs 50

Rs 40

Rs 70

#### SOLUTION

Solution :A

MPS = ΔSΔY

ΔS = MPS * ΔY

= 0.6 * 100

= Rs. 60

### Question 2

On account of an injection of aggregate demand, the equilibrium level of income

Increases

Decreases

Remains constant

None of these

#### SOLUTION

Solution :A

On account of an injection of aggregate demand, the equilibrium level of income increases.

### Question 3

When C = 300 + 0.8Y and Y = 1,000, saving at zero income level will be

300

-300

1,100

800

#### SOLUTION

Solution :B

C + S = Y

At zero income level,

C = -S

When Y = 0, C = 300 + 0.8(0) = 300

Therefore, S = -300

### Question 4

If MPC increases, the value of multiplier will

Increase

Decrease

Remains constant

Increase as much as the increase in MPC

#### SOLUTION

Solution :A

If MPC increases, the value of multiplier will increase.

### Question 5

If MPC = MPS, the value of multiplier will be:

0

1

2

∞

#### SOLUTION

Solution :C

If MPC = MPS, then, MPC = MPS = 0.5.

Multiplier = 11−0.5

= 2

### Question 6

If income increases from 3,000 to 4,000, and autonomous investment increases by 200, the MPC should be

0.9

0.8

0.7

0.6

#### SOLUTION

Solution :B

Multiplier (M) = ΔYΔA

= (4000−3000)200

= 5

MPS = 1M = 0.2

Therefore, MPC = 1 - MPS = 0.8

### Question 7

Find out the value of the multiplier, if MPC is zero.

0

1

Infinity

Cannot be determined

#### SOLUTION

Solution :B

Multiplier = 11−MPC

= 1.

### Question 8

Saving can never be negative.

True

False

#### SOLUTION

Solution :B

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

### Question 9

Find MPC when investment multiplier = 1.

1.2

1

0

1.5

#### SOLUTION

Solution :C

M(multiplier) =11−MPC

Given that, 11−MPC=1⇒1=1−MPC

⇒ MPC = 1 - 1 = 0

Thus, when M = 1, MPC = 0.

### Question 10

Find incremental investment when equilibrium GDP increases by Rs 50,000 and half of additional income is always saved in the economy.

Rs 25,000

Rs 35,000

Rs 15,000

Rs 50,000

#### SOLUTION

Solution :A

Change in savings =50,000×12=25,000

We know, MPS=ΔSΔY=25,00050,000=0.5

We know,

Multiplier (M)=11−MPC=1MPS

Or, M=ΔYΔI

Now, MPS = 0.5, we get ΔI=ΔYM

=50,0002=25,000 [M=1MPS=10.5=2]

Increase in GDP by Rs 50,000 is caused by increase in investment of Rs 25,000.