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

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

A.

Rs 60

B.

Rs 50

C.

Rs 40

D.

Rs 70

#### SOLUTION

Solution : A

MPS = ΔSΔY

ΔS = MPS * ΔY

= 0.6 * 100

= Rs. 60

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

A.

Increases

B.

Decreases

C.

Remains constant

D.

None of these

#### SOLUTION

Solution : A

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

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

A.

300

B.

-300

C.

1,100

D.

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

If MPC increases, the value of multiplier will

A.

Increase

B.

Decrease

C.

Remains constant

D.

Increase as much as the increase in MPC

#### SOLUTION

Solution : A

If MPC increases, the value of multiplier will increase.

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

A.

0

B.

1

C.

2

D.

#### SOLUTION

Solution : C

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

Multiplier = 110.5

= 2

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

A.

0.9

B.

0.8

C.

0.7

D.

0.6

#### SOLUTION

Solution : B

Multiplier (M) = ΔYΔA

= (40003000)200

= 5

MPS = 1M = 0.2

Therefore, MPC = 1 - MPS = 0.8

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

A.

0

B.

1

C.

Infinity

D.

Cannot be determined

#### SOLUTION

Solution : B

Multiplier = 11MPC

= 1.

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.

Find MPC when investment multiplier = 1.

A.

1.2

B.

1

C.

0

D.

1.5

#### SOLUTION

Solution : C

M(multiplier) =11MPC

Given that,    11MPC=11=1MPC

MPC = 1 - 1 = 0

Thus, when M = 1, MPC = 0.

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

A.

Rs 25,000

B.

Rs 35,000

C.

Rs 15,000

D.

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)=11MPC=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.