Prasanna

Determination of Income and Employment Class 12 MCQs Questions with Answers

Question 1.

If Marginal Propensity to Save (MPS) is 0.25 and initial change in investment is X250 crores, then the final change in income would be .

(A) ₹ 1,000 crores
(B) ₹ 1,200 crores
(C) ₹ 500 crores
(D) ₹ 3,500 crores
Answer:
(A) ₹ 1,000 crores

Explanation:
∆Y = ∆I \(\frac {1}{MPS}\)
∆Y = ₹ 250 x \(\frac {1}{0.25}\)
= ₹ 1,000 crores

Question 2.

If the value of Average Propensity to Consume (APC) is 0.8 and National Income is ₹ 4,000 crores, the value of savings will be ………..

(A) ₹ 100 crores
(B) ₹ 200 crores
(C) ₹ 800 crores
(D) ₹ 500 crores
Answer:
(C) ₹ 800 crores

Explanation:
APC = \(\frac {C}{Y}\)
0.8 = \(\frac {C}{₹ 4,000}\)
C = ₹ 3,200 crores
S = Y – C
= ₹ 4,000 – ₹ 3,200
= ₹ 800 crores

Question 3.

Income rises from ₹ 50,000 to ₹ 60,000, consumption increases from ₹ 40,000 to ₹ 48,000. In this situation, what will be the value of Marginal Propensity to Consume (MPC)?

(A) 0.80
(B) 0.20
(C) 0.10
(D) 0.90
Answer:
(A) 0.80

Explanation:
MPC = \(\frac {∆C}{∆Y}\)
= \(\frac {8,000}{10,000}\) = 0.8

Question 4.

If the value of Average Propensity to Save (APS) is 0.2 and National Income is ₹ 4,000 crores, then consumption will be …………..

(A) ₹ 4,000 crores
(B) ₹ 3,200 crores
(C) ₹ 3,800 crores
(D) ₹ 2,600 crores
Answer:
Option (B) is correct

Explanation:
APS = \(\frac {S}{Y}\)
0.8 = \(\frac {S}{4,000}\)
S = ₹ 800 crores
C = Y – S = ₹ 4,000 – 800
= ₹ 3,200 crores

Question 5.

Suppose in a hypothetical economy, the income rises from ₹ 5,000 crore to ₹ 6,000 crore. As a result, the consumption expenditure rises from ₹ 4,000 crore to ₹ 4,600 crore. Marginal propensity to consume in such a case would be

(A) 0.8
(B) 0.4
(C) 0.2
(D) 0.6
Answer:
(D) 0.6

Explanation:
The average propensity to consume (AFC) measures the percentage of income that is spent rather than saved.
MPC = \(\frac {∆C}{∆Y}\)
= \(\frac {600}{1,000}\)
= 0.6

Question6.

In an open economy, Aggregate Demand is estimated as:

(A) private consumption expenditure + private investment expenditure + government expenditure + exports
(B) private consumption expenditure + private investment expenditure -I- government expenditure + imports
(C) private investment expenditure + government expenditure + net exports
(D) pnvate consumption expenditure + private investment expenditure + government expenditure + net exports
Answer:
(D) pnvate consumption expenditure + private investment expenditure + government expenditure + net exports

Explanation:
Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year

Question 7.

Identify the correctly matched paix from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)

Question 8.

Consumption depends on:

(A) ncome
(B) Saving
(C) Aggregate Demand
(D) Both (A) and (B)
Answer:
(A) ncome

Explanation:
C = f(Y)

Question 9.

Average Propensity to Consume is equal to:

(A) \(\frac {C}{Y}\)
(B) C – Y
(C) \(\frac {∆C}{∆Y}\)
(D) ∆Y – ∆C
Answer:
(A) \(\frac {C}{Y}\)

Explanation:
The average propensity to consume (APC) measures the percentage of income that is spent rather than saved

Question 10.

Identify the correctly matched pair from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(C) 3 – (c)

Explanation:
Autonomous investment refers to that portion of total investment which is independent of the change in the Level of income, interest rate and rate of profit. Investment in public utility services are considered autonomous investment because these type of investments made by the government does not rely on the decisional profit or loss.

Question 11.

Identify the correctly matched pair from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)

Explanation:
Marginal Propensity to Consume is the ratio of change in consumption due to change in income.

Question 12.

Marginal Propensity to Save is equal to:

(A) ∆S – ∆Y
(B) \(\frac {Y}{S}\)
(C) \(\frac {∆S}{∆Y}\)
(D) S – Y
Answer:
(C) \(\frac {∆S}{∆Y}\)

Explanation:
Marginal propensity to save (MPS) is an economic measure of how savings change, given a change in income.

Question 13.

\(\overline{\mathbf{C}}\) indicates:

(A) consumption related to income.
(B) saving related to income.
(C) minimum consumption level even when income is zero.
(D) none of the above.
Answer:
(C) minimum consumption level even when income is zero.

Question 14.

Which of the following statements is correct?

(A) Aggregate Demand refers to the total demand for the goods and services in the economy as a whole.
(B) Aggregate Demand constitutes of Consumption Expenditure, Investment Expenditure and Government Expenditure only.
(C) The expenditure of household and private investors in an economy for an accounting year is termed as Public Consumption Expenditure.
(D) The demand of only goods by the households in an economy is termed as Private Investment Expenditure.
Answer:
(A) Aggregate Demand refers to the total demand for the goods and services in the economy as a whole.

Explanation:
Components of Aggregate Demand:
(i) Private consumption expenditure
(ii) Government consumption expenditure
(iii) Investment expenditure
(iv) Net exports

Question 15.

Which of the following statements is not correct?

(A) APC is the ratio of consumption expenditure to any particular level of income.
(B) MPC is the ratio of a change in consumption to the change in income.
(C) APS is the ratio of savings to any particular level of consumption.
(D) MPS is the ratio of a change in savings to the change in the income.
Answer:
(C) APS is the ratio of savings to any particular level of consumption.

Explanation:
Average propensity to save refers to the proportion of income that is saved rather than spent on current goods and services.

Question 16.

In case of an under-employment equilibrium, which of the following alternatives is not true?

(A) Aggregate Demand is equal to Aggregate Supply.
(B) There exists excess production capacity in the economy.
(C) Resources are not fully and efficiently utilised.
(D) Resources are fully and efficiently utilised.
Answer:
(D) Resources are fully and efficiently utilised.

Explanation:
When aggregate demand is equal to aggregate supply at less than full employment, it is a situation of under employment equilibrium.

Question 17.

Equilibrium level of income/output is established when:

(A) AS = AD
(B) C = I
(C) S = Y
(D) none of the above.
Answer:
(A) AS = AD

Explanation:
Equilibrium output refers to a situation when in an economy:
AD = AS
So that, all the producers who wish to produce during the year is exactly equal to what the buyers wish to spend on the purchase of goods and services during the year.

Question 18.

Which of the following statements is false?

(A) An economy can attain the maximum equilibrium GDP level even when excess capacity is not fully exhausted.
(B) An economy can attain the maximum equilibrium GDP level only when excess capacity is fully exhausted.
(C) An economy can attain the maximum equilibrium GDP level even when excess capacity is partially exhausted.
(D) An economy can attain the minimum equilibrium GDP level even when excess capacity is fully exhausted.
Answer:
(B) An economy can attain the maximum equilibrium GDP level only when excess capacity is fully exhausted.

Question 19.

Level of planned output coincides with planned expenditure when:

(A) AD = AS
(B) C = I
(C) both (A) and (B)
(D) none of these
Answer:
(A) AD = AS

Explanation:
When AD = AS, all the producers who wish to produce during the year is exactly equal to what the buyers wish to spend on the purchase of goods and services during the year.

Question 20.

Which of the following is correct in reference to equilibrium level of GDP?

(A) Y = C + MPC(Y) – 1
(B) Y = C + MPC(Y) + 1
(C) Y = C – MPC(Y) – 1
(D) Y = C – MPC(Y) + 1
Answer:
(B) Y = C + MPC(Y) + 1

Question 21.

In a situation of S < I:

(A) fall in expenditure through ‘S’ < rise in expenditure through T
(B) fall in expenditure through ‘S’ > rise in expenditure through ‘I’.
(C) AS < AD
(D) both (A) and (C)
Answer:
(D) both (A) and (C).

Question 22.
When the planned flow of goods and services in the economy is less than their planned demand:
(A) AS = AD
(B) AS > AD
(C) AS < AD
(D) None of these
Answer:
(C) AS < AD

Explanation:
When AS < AD, flow of goods and services in the economy tends to be less than their demand.

Question 23.

Which of the following statements is true?

(A) Equilibrium CDI’ refers to that Icvel of GDP where AD = AS but S<I.
(B) Equilibrium GDP refers to that level of CD? where AD AS but S>L
(C) Equilibrium GDP refers to that level of GDP where AD = AS and S=l.
(D) Equilibrium GD? refers to that level of GD? Where AD > AS but S<L
Answer:
Option (C) is correct.

Explanation:
AD = C + I
AD = C + S
Equilibrium Output,
AD = AS
C + S = C + I
S = I

Question 24.

Which of the following statements is true?

(A) Under employment equilibrium refers to the situation when people who are able and willing to work at the prevailing wage rate do not get employment.
(B) Under employment equilibrium refers to the situation when people who are not able but are willing to work at the prevailing wage rate do not get employment
(C) Full employment equilibrium refers to the situation when people who are not able but are willing to work at the prevailing wage rate do not get employment.
(D) Full employment equilibrium refers to the situation when people who are able and willing to work at the prevailing wage rate get employment.
Answer:
(D) Full employment equilibrium refers to the situation when people who are able and willing to work at the prevailing wage rate get employment.

Question 25.

If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be:

(A) greater than 2
(B) less than 2
(C) equal to 2
(D) equal to 5
Answer:
(A) greater than 2

Explanation:
MFC = 0.6
MPS = 0.4
K = 1/MPS
= 1/1 – MPC
= -1/0.4
i = 2.5

Question 26.

The value of multiplier is:

(A) \(\frac {1}{MPC}\)
(B) \(\frac {1}{MPS}\)
(C) \(\frac {1}{1 – MPS}\)
(D) \(\frac {1}{MPC}\)
Answer:
(B) \(\frac {1}{MPS}\)

Question 27.

If MPC = 1, the value of multiplier is:

(A) 0
(B) 1
(C) Between 0 and 1
(D) Infinity
Answer:
(D) Infinity

Explanation:
K = 1/1 – MPC
K = 1/0
K = ∞

Question 28.

If MPS = 0, the value of multiplier will be ………….

(A) 2
(B) 1
(C) 0
(D) ∞
Answer:
(D) ∞

Explanation:
K = 1/MPS
K = 1/0
K = ∞

Question 29.

If the value of MPS is 0.4, what will be the value of …………… investment multiplier ?

(A) 3
(B) 4
(C) 2.5
(D) 2
Answer:
(C) 2.5

Explanation:
K = 1/MPS
K = 1/0.4
K = 2.5

Question 30.

Which of the following statements is correct?

(A) Autonomous investment refers to investment which is dependent on the level of income in the economy.
(B) Autonomous investment refers to investment which is dependent on the level of consumption in the economy.
(C) Autonomous investment refers to investment which is independent of the level of income in the economy.
(D) Autonomous investment refers to investment which is dependent of the level of consumption in the economy.
Answer:
(C) Autonomous investment refers to investment which is independent of the level of income in the economy.

Question 31.

Which of the following statements is true?

(A) When MPS = 1, the value of investment multiplier is also 1.
(B) When MPS = 1, the value of investment multiplier is 0.
(C) When MPS = 0.5, the value of investment multiplier is 1.
(D) When MPS = 1, the value of investment multiplier is 0.5.
Answer:
(A) When MPS = 1, the value of investment multiplier is also 1.

Explanation:
K = 1/MPS
K = 1/1 K = 1

Question 32.

Which of the following statements is true?

(A) Value of multiplier will be zero of entire additional income consumption is converted into additional consumption.
(B) Value of multiplier will be infinity of entire additional income consumption is converted into additional consumption.
(C) Value of multiplier will be unitary of entire additional income consumption is converted into additional consumption.
(D) Value of multiplier cannot be determined of entire additional income consumption is converted into additional consumption.
Answer:
(B) Value of multiplier will be infinity of entire additional income consumption is converted into additional consumption.

Explanation:
∆Y = ∆C
MPC = ∆C/∆Y
MPC = ∆C/∆C = 1
MPS = 1 – MPC = 0
K = 1/MPS = 1/0 = ∞
(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)

Explanation:
K= 1/MPS
K = 1/1 – MPC
K = 1/1 – 1
K = 1/0
K = ∞

Question 33.

Identify the correctly matched pair from Column A to ColumnB:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)

Explanation:
K = 1/MPS
K = 1/1 – MPC
K = 1/1 – 1
K = ∞

Question 34.

Identify the correctly matched pair from Column A to Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(C) 3 – (c)

Explanation:
The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving.

Assertion and Reason Based MCQs

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.

Question 1.

Assertion (A): Aggregate Demand is expressed in terms of total expenditure made in the economy. Reason (R): Aggregate Demand constitutes of Consumption Expenditure, Investment Expenditure, Government Expenditure and Net Exports.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year.

Question2.

Assertion (A): Aggregate demand refers to planned purchase of goods and services during a year.
Reason (R): AD is the sum total of expenditure that the people plan or desire to incur on the purchase of goods and services produced in an economy during an accounting year.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Question 3.

Assertion (A): Private Consumption Expenditure is determined by the level of personal disposable income of the economy.
Reason (R): The total demand for all goods or services by the household in an economy during an accounting year, is termed as Private Consumption Expenditure.

Answer:
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

Explanation:
Private consumption expenditure measures consumer spending on goods and services.

Question 4.

Assertion (A): When income is zero, consumption is also zero.
Reason (R): There is always some minimum level of consumption in the economy even when income is zero.

Answer:
(D) Assertion (A) is false, but Reason (R) is true.

Explanation:
When income is zero, consumption is not zero as there is always some minimum level of consumption in the economy.

Question 5.

Assertion (A): Full employment is the situation where all those workers who are able to work and willing to work get employment at the prevailing wage rate.
Reason (R): The situation of full employment is achieved only when the economy is in equilibrium.

Answer:
(C) Assertion (A) is true, but Reason (R) is false.

Explanation:
Full employment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply at full employment level.

Question 6.

Assertion (A): If S > I, then equilibrium income will have a tendency to reduce.
Reason (R): As according to Keynes, the income- employment equilibrium is determined at the point where investments and savings are equal.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Question 7.

Assertion (A): If AD>AS, the firm will employ more factors of production.
Reason (R): When AD is more, in order to get back to the equilibrium level the economy bringing AD equal to AS.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Question 8.

Assertion (A): AS increases proportionate to the increase in AD so long as there is excess capacity in the economy.
Reason (R): Excess capacity arises because of excess supply.

Answer:
(C) Assertion (A) is true, but Reason (R) is false.

Explanation:
Excess capacity arises because of deficiency of demand.

Question 9.

Assertion (A): There is an inverse relationship between the value of marginal propensity to save and investment multiplier.
Reason (R): Saving is a leakage in the circular flow of income. Greater the saving, greater the leakage and lower the value of investment multiplier.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
Higher the MPS, lower the multiplier and lower the MPS, higher multiplier, as K= I/MPS.

Question 10.

Assertion (A): Saving and investment are always equal.
Reason (R): Planned S and Planned I are equal only at equilibrium level.

Answer:
(D) Assertion (A) is false, but Reason (R) is true.

Explanation:
Saving (S) and Investment (1) can be realized (ex-post) and planned (ex-ante), Planned S and Planned are equal only at equilibrium level. Realized S and realized are always equal..

Question 11.

Assertion (A): The minimum value of investment multiplier is equal to one.
Reason (R): The minimum value of investment multiplier is 1, when MPC is 0 and MPC can never be negative.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
K = 1/1 – MPC
i = 1/1 – 0 = 1

Question 12.

Assertion (A): The maximum value of investment multiplier is equal to infinity.
Reason (R): The maximum value of investment multiplier is ∞, when MPC is 1, i.e., whole additional income is converted into additional consumption.

Answer:
Option (A) is correct.
Explanation:
K= 1/1 – MPC
= 1/1 – 1
= 1/0 = ∞

Case-Based MCQs

I. Read the following report and answer the questions that follow:
Due to the Covid-19 situation, there has been a fall in the savings of the people, and they are spending the savings. This has led to the consumption to be done by the reduction of the savings. In order to control the situation, the government has announced various stimulus packages to revive the economy and providing employment through road and railway building projects. Still the desired savings or ex-ante savings that is required for the functioning of the economy has reduced. It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the aggregate demand in the economy.

Question 1.

Due to the Covid-19 situation what has happened:

(A) Ex-ante saving has increased.
(B) Ex-post saving has increased.
(C) Ex-ante saving has reduced.
(D) Ex-post savings has reduced.
Answer:
(C) Ex-ante saving has reduced.

Explanation:
Due to the Covid-19 situation, people used their savings for consumption. Thus, there has been a fall in the savings of the i people.

Question 2.

The fall in the savings is due to:

(A) Decrease in income.
(B) Increase in consumption.
(C) Increase in government expenditure.
(D) Using savings for consumption.
Answer:
(D) Using savings for consumption.

Explanation:
Due to the Covid-19 situation, income of the people has decreased, Thus, people used their savings for Iheir consumption.

Question 3.

Which options did the government use to increase the savings and consumption in the economy:

(1) Giving stimulus packages
(2) Reducing investment in infrastructure
(3) Open Market Operations
(4) Providing employment Choose the correct option:
(A) land2
(B) 1,2 and 3
(C) 1 and 4
(D) 1,2 and 4
Answer:
(C) 1 and 4

Explanation:
Government has announced ? various stimulus packages to revive the economy and to invest in infrastructure such “as building roads and railways to provide -5 employment.

Question 4.

It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the in the …………. economy.

(A) Aggregate demand
(B) Aggregate supply
(C) Investment
(D) None of the above
Answer:
(A) Aggregate demand

II. Read the report given below and answer the questions that follow:
In an economy the Aggregate Demand is determined by consumption, Government Expenditure and Net Exports in the economy. This is affected by the Savings and Investment in the economy. The Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing the Aggregate Demand and Supply Any change in any of the factors leads to a big change in the economy’s equilibrium as a whole. It is to be kept in mind that the economy needs to be in equilibrium condition. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.

Question 1.

Aggregate Demand is not determined by which of the following:

(A) Consumption Expenditure
(B) Investment Expenditure
(C) Net Exports
(D) Government Policies
Answer:
(D) Government Policies

Explanation:
A D = C + 1 + G + X – M
Where,
C = Household Consumption Expenditure
l = Private Investment Expenditure
G = Government Expenditure
X – M = Net Exports

Question 2.

Savings and Investment affect the ……………

(A) Aggregate demand and supply
(B) Government policies
(C) Government budget
(D) None of the above
Answer:
(A) Aggregate demand and supply

Question 3.

Investment Multiplier is the ratio of change in …………… and ………….

(A) Income, Investment
(B) Savings, Income
(C) Investment, Consumption
(D) Savings, Investment
Answer:
(A) Income, Investment

Explanation:
The term investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy.

Question 4.

What happens when the Investment is lesser than Savings?

(A) Aggregate Demand is more than the Aggregate Supply
(B) Aggregate Demand is less than the Aggregate Supply
(C) Aggregate Demand is equal to the Aggregate Supply
(D) Aggregate Demand is independent of Aggregate Supply
Answer:
(B) Aggregate Demand is less than the Aggregate Supply

Explanation:
When the investment is less than savings, the expenditure in the economy is less than what producers had expected, resulting in undesired building-up of unsold stock. Consequently, AD falls short of AS.

III. Read the report given below and answer the questions that follow:
When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex-ante consumption, ex-ante investment, government spending, etc. The rate of increase in ex-ante consumption due to a unit increment in income is called marginal propensity to consume.

For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

Question 1.

The equilibrium level is when,

(A) AD = AS
(B) AD > AS
(C) AD < AS
(D) AD < I
Answer:
(A) AD = AS

Explanation:
The equilibrium is when AD = AS. So that, all the producers wish to produce during the year is exactly equal to what the buyers wish to spend on the purchase of goods and services during the year.

Question 2.

The rate of increase in ………….. due to a unit increment in income is called marginal propensity to consume.

(A) Ex-post consumption
(B) Ex-ante consumption
(C) Both (A) and (B)
(D) None of the above
Answer:
(B) Ex-ante consumption

Explanation:
MPC is the ratio between change in consumption and change in income.

Question 3.

At the price level mentioned in the case, Aggregate Supply is .

(A) Perfectly Elastic
(B) Perfectly Inelastic
(C) Unitary Elastic
(D) Elastic
Answer:
(A) Perfectly Elastic

Question 4.

What is the circumstance when aggregate output is determined solely by the level of aggregate demand called?

(A) Investment Multiplier
(B) Effective Demand
(C) Propensity to Consume
(D) Propensity to Save
Answer:
(B) Effective Demand

To correct the situation of deficient demand RBI will reduce repo rate. Banks in turn will reduce lending rate of interest, so there will be more demand for loans. This will increase money supply and correct the situation of deficient demand.

Problems And Measures Of Excess & Deficient Demand Class 12 MCQs Questions with Answers

Question 1.

When aggregate demand is greater than aggregate supply, inventories:

(A) fall
(B) rise
(C) do not change
(D) first fall, then rise
Answer:
(A) fall

Explanation:
If aggregate demand is greater than aggregate supply, flow of goods and services in the economy tends to be less than their demand, which means the existing stock of producers would be sold out.

Question 2.

A situation when AS = AD along with fuller utilisation of resources in the economy is called:

(A) underemployment equilibrium.
(B) inflationary gap.
(C) equilibrium without excess capacity.
(D) deflationary gap.
Answer:
(C) equilibrium without excess capacity.

Explanation:
When AD = AS, all the producers wish to produce during the year is exactly equal to what the buyers wish to spend on the purchase of goods and services during the year, so, there is no excess capacity.

Question 3.

In case of underemployment equilibrium:

(A) AS < AD
(B) there is excess capacity in the economy
(C) resources are not fully utilised
(D) both (B) and (C)
Answer:
(D) both (B) and (C

Question 4.

Full employment:

(A) is consistent with ‘natural rate of unemployment’.
(B) occurs when demand for labour force = supply of labour force.
(C) AS = AD with zero level of unemployment.
(D) both (A) and (B)
Answer:
(D) both (A) and (B)

Question 5.

Which of the following statements is true?

(A) Full employment means zero unemployment.
(B) Full employment means natural rate of unemployment.
(C) Full employment means negative employment.
(D) Underemployment means zero employment.
Answer:
(B) Full employment means natural rate of unemployment.

Explanation:
The natural rate of unemployment, when an economy is in a steady state of “full employment”, there is no involuntary unemployment.

Question 6.

Which of the following statements is not correct regarding Excess Demand?

(A) Excess Demand raises the market value of output.
(B) Excess Demand means Aggregate Demand is more than Aggregate Supply.
(C) Excess Demand is caused due to reduction in the public expenditure.
(D) Excess Demand is the result of decline in exports.
Answer:
(D) Excess Demand is the result of decline in exports.

Explanation:
Excess demand arises when demand for exports increases due to is comparatively lower prices of domestic goods or due to decrease in the exchange rate for domestic currency.

Question 7.

Deficient demand leads to:

(A) deflationary gap
(B) excess capacity
(C) low level of employment
(D) all of the above
Answer:
(D) all of the above

Explanation:
Deficient demand refers to the situation when aggregate demand (AD) is short of aggregate supply (AS) corresponding to full employment in an economy.

Question 8.

Aggregate demand can be increased by:

(A) Increasing bank rate.
(B) Selling government securities by Reserve Bank of India.
(C) Increasing cash reserve ratio.
(D) None of the above.
Answer:
(D) None of the above.

Question 9.

Aggregate demand can be decreased by:

(A) Rise in Bank Rate.
(B) Purchase of securities in Open Market.
(C) Deficit Budget.
(D) None of the above
Answer:
(A) Rise in Bank Rate.

Explanation:
In case of deficient demand, there is a need to liberalize credit. It can be done J z by reducing bank rale so that the commercial banks also reduce their lending rale, thereby increasing the availability of credit in the economy.

Question 10.

Identify the correctly matched pair from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(A) 1 – (a)

Question 11.

Which of the following statements is correct with respect to the correction of Excess Demand?

(A) Government reduces the taxes.
(B) Government reduces its expenditure.
(C) The Central Bank reduces bank rates.
(D) The Central Bank sells securities from the Open Market.
Answer:
(B) Government reduces its expenditure.

Explanation:
Decrease in Government spending will reduce the level of aggregate j demand in the economy and will help to | correct inflationary pressures in the economy.

Question 12.

Identify the correctly matched pair from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)

Explanation:
Fiscal policy is the use of government spending and taxation to influence the economy.

Question 13.

Identify the correctly matched pair from Column A to that of Column B:

(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(C) 3 – (c)

Explanation:
Policy adopted by the Central Bank of an economy in the direction of credit control or money supply is known as Monetary Policy.

Question 14.

Which of the following statements is not correct with respect to the correction of Deficient Demand?

(A) Government reduces the taxes.
(B) The Central Bank increases the bank rate.
(C) The Central Bank reduces the CRR and SLR.
(D) The Government increases its spending.
Answer:
(B) The Central Bank increases the bank rate.

Explanation:
In case of deficient demand, there is a need to liberalize credit. It can be done by reducing bank rate so that the commercial banks also reduce their lending rate, thereby increasing the availability of credit in the economy.

Question 15.

The government encourages exports to correct excess capacity in the economy. This may lead to:

(A) inflation in the local market.
(B) rise in voluntary unemployment.
(C) rise in aggregate demand to match aggregate supply.
(D) fall in voluntary unemployment.
Answer:
(C) rise in aggregate demand to match aggregate supply.

Assertion and Reason Based MCQs

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
(B) Both’ Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.

Question 1.

Assertion (A): Full employment mean zero unemployment.
Reason (R): Even in the situation of full employment, natural rate of unemployment always exits in the economy.

Answer:
(D) Assertion (A) is false, but Reason (R) is true.

Explanation:
Natural rate of unemployment refers to the minimum rate of unemployment which always exists in the economy even when labour market is in a state of equilibrium.

Question 2.

Assertion (A): Voluntary unemployment occurs in the economy under deflationary gap.
Reason (R): In the situation of deflationary gap, involuntary unemployment exists.

Answer:
(D) Assertion (A) is false, but Reason (R) is true.

Explanation:
Due to deficient demand, investment level is reduced, which causes involuntary unemployment in the economy due to fall in the planned output

Question 3.

Assertion (A): Excess demand raises the market value of output.
Reason (R): Higher demand than supply leads to decrease in general price level.

Answer:
(C) Assertion (A) is true, but Reason (R) is false.

Explanation:
Higher demand than supply leads to increase in general price level.

Question 4.

Assertion (A): The economy fails to create enough jobs under involuntary unemployment.
Reason (R): Planned output is lower than the full employment level of output.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).

Explanation:
Due to the lack of aggregate demand, planned output is lower than the full employment level of output and the economy fails to create enough jobs.

Question 5.

Assertion (A): The Government increases taxes in order to correct the problem of Excess Demand.
Reason (R): When taxes are increased it reduces the purchasing power of the public, thus reducing the Aggregate Demand.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).

Explanation:
During inflation, government should raise rates of all taxes especially on rich ( people because taxation withdraws purchasing power from the taxpayers and to that extent reduces effective demand.

Question 6.

Assertion (A): The Government reduces expenditure in order to correct the problem of Excess Demand.
Reason (R): Government expenditure is the type of Fiscal Policy measure used by the government to correct Excess Demand

Answer:
(B) Both’ Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).

Explanation:
Decrease in Government spending will reduce the level of aggregate demand in the economy and will help to correct inflationary pressures in the economy

Question 7.

Assertion (A): The Central Bank sells securities in order to correct the problem of Deficient Demand.
Reason (R): Open Market Operations is the monetary policy measure used by the central bank to correct deficient demand conditions in the economy.

Answer:
(B) Both’ Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).

Explanation:
During deficient demand, the central bank starts purchasing securities from the open market. It increases the money supply and enhances the purchasing power capacity and increases level of aggregate demand in the economy.

Case-Based MCQs

I. Read the following news report and answer the questions on the basis of the same :

The Reserve Bank of India (RBI) cut Repo Rate to 4.4%, the lowest in atleast 15 years. Also, it reduced the Cash Reserve Ratio (CRR) maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basic points to release 1.37 lakh crores across the banking system.

RBI governor Dt Shaktikanta Das predicted a big global recession and said india will not be immune. It all depends how India responds to the situation, Aggregate demand may weaken and ease core inflation. – The Econm,c Times; Marth 27th, 2020

Question 1.

Cut in Repo rate by RBI is likely to …………… the demand for goods and services in the economy.

(A) Increase
(B) Decrease
(C) Either (A) or (B)
(D) Neither (A) nor (B)
Answer:
(A) Increase

Explanation:
To correct the situation of deficient demand RBI will reduce cash reserve ratio. Banks inturn will have more money to lend. This will increase money supply and correct the situation of deficient demand. the Cash Reserve Ratio (CRR) maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basic points to release ₹ 1.37 lakh crores across the banking system. RBI

Question 2.

Decrease in Cash Reserve Ratio will lead to …………..

(A) fall in aggregate demand.
(B) rise in aggregate demand.
(C) no change in aggregate demand.
(D) fall in general price level.
Answer:
(C) no change in aggregate demand.

Explanation:
To correct the situation of deficient demand RBI will reduce cash reserve ratio. ianks inturn will have more money to lend. This will increase money supply and correct the sihiation of deficient demand.

Question 3.

The difference by which actual Aggregate Demand exceeds the Aggregate Demand, required to establish full employment equilibrium is known as ……………….

(A) Inflationary gap
(B) Deflationary gap
(C) Either (A) or (B)
(D) Neither (A) nor (B)
Answer:
(C) Either (A) or (B)

Question 4.

The impact of ‘Excess Demand’ under Keynesian theory of income and employment, in an economy are:

(A) decrease in income, output, employment and general price level.
(B) decrease in nominal income, but no change in real output.
(C) increase in income, output, employment and general price level,
(D) no change in output/employment but increase in general price level
Answer:
(D) no change in output/employment but increase in general price level

II. Read the following news report and answer the questions that follow on the basis of the same:

New Delhi:
The Indian economy will suffer its deepest contraction on record this fiscal year and recent government stimulus does not go far enough to significantly boost activity depressed by the coronavirus pandemic, according to economists polled by Reuters. With over 7.6 million coronavirus infections, India is the second worst hit country in the world after the United States and the spread shows no signs of abating.

While the government has removed most restrictions imposed on businesses to slow the spread of the virus, the Reserve Bank of India issued gloomy economic forecasts earlier this month but kept interest rates unchanged citing rising inflation. “Indian economy set for a n’ar double-digit contraction this fiscal “ – The £anwmic Times – Octo1r 22nd, 2020

Question 1.

Cut in Repo rate by RBI is likely to the demand for goods and services in the economy.

(A) Increase
(B) Decrease
(C) Either (A) or (B)
(D) Neither (A) nor (B)
Answer:
(A) Increase

Explanation:
To correct the situation of deficient demand RBI will reduce repo rate. Banks in turn will reduce lending rate of interest, so there will be more demand for loAnswer: This will increase money supply and correct the situation of deficient demand.

Question 2.

Decrease in Cash Reserve Ratio will lead to ……………

(A) fall in aggregate demand.
(B) rise in aggregate demand.
(C) no change in aggregate demand.
(D) fall in general price level.
Answer:
(C) no change in aggregate demand.

Question 3.

What is the ¡nain reason for the central bank to not increase the interest rates?

(A) Curbrng Inflation
(B) Curbing Deflation
(C) Controlling the Economy
(D) Relying more on Fiscal Fklicy
Answer:
(A) Curbrng Inflation

Question 4.

The impact of ‘Excess Demand’ under Keynesian theory of income and employment, in an economy are :

(A) decrease in income, output, employment and general price level.
(B) decrease in nominal income, but no change in real output.
(C) increase in income, output, employment and general price level.
(D) no change in output/employment but increase in general price level.
Answer:
(D) no change in output/employment but increase in general price level.

II. Read the following news report and answer the questions that follow on the basis of the same: New Delhi: The Indian economy will suffer its deepest contraction on record this fiscal year and recent government stimulus does not go far enough to significantly boost activity depressed by the coronavirus pandemic, according to economists polled by Reuters. With over 7.6 million coronavirus infections, India is the second worst hit country in the world after the United States and the spread shows no signs of abating.

While the government has removed most restrictions imposed on businesses to slow the spread of the virus, the Reserve Bank of India issued gloomy economic forecasts earlier this month but kept interest rates unchanged citing rising inflation “Indian economy set for a near double-digit contraction this fiscal” – The Economic Times – October 22nd, 2020

Question 1.

Why has the government given a stimulus package?

(A) To increase the Aggregate Demand.
(B) To increase the Aggregate Supply.
(C) To increase the GDP of the economy.
(D) To gain votes in the election.
Answer:
(A) To increase the Aggregate Demand.

Explanation:
Due to Covid, income level decreased, resulting decreased aggregate demand.

Question 2.

What has the government done to slow down the spread of corona virus?

(A) Increased the government spending.
(B) Increased the taxes.
(C) Imposed the restriction on businesses.
(D) Done nothing at all.
Answer:
(C) Imposed the restriction on businesses.

Question 3.

What is the main reason for the central bank to not increase the interest rates?

(A) Curbing Inflation
(B) Curbing Deflation
(C) Controlling the Economy
(D) Relying more on Fiscal Policy
Answer:
(A) Curbing Inflation

Question 4.

What is the situation faced by the economy in the current Covid-19 situation?

(A) Excess Demand
(B) Deficient Demand
(C) Aggregate Demand
(D) Aggregate Supply
Answer:
(B) Deficient Demand

Explanation:
When aggregate demand is less than aggregate supply at full employment level, there is deficient demand in the economy.

III. Read the following news report and answer the questions that follow on the basis of the same: New Delhi: India needs to raise its inflation target, make the entire framework more flexible, and widen the remit of the monetary policy committee, to effectively deal with the current economic crisis and strengthen the monetary policy framework, some leading economists said.

They proposed a higher headline inflation target of 5-6% accompanied by a core inflation target. This way, the monetary policy committee (MPC) could focus on either of those depending on the situation and keep prices under control without hampering economic growth.

The Reserve Bank of India should take a medium- term outlook to achieve these targets while empowering MPC with control over all monetary policy instruments rather than just the repo rate, some of the country’s top economists told ET. “Inflation target should be higher, wider: Experts” – The Economic Times – October 17th, 2020

Question 1.

Why does India have to raise its Inflation target?

(A) Due to Covid-19 the country is suffering from deficient demand.
(B) Due to Covid-19 the country is facing inflationary challenges.
(C) Due to Covid-19 the country is facing economic crisis.
(D) All of the above.
Answer:
(D) All of the above.

Question 2.

The …………… needs to increase the inflation target to 5 – 6%.

(A) Monetary Policy Committee
(B) Fiscal Policy Committee
(C) Inflation Check Committee
(D) None of the above
Answer:
(A) Monetary Policy Committee

Question 3.

Read the following statements – Assertion (A) and Reason (R).
Assertion (A): RBI focusing on repo rate as compared to other monetary policy instruments.
Reason (R): Repo-rate effects the lending rate of the commercial bank.
Select the correct alternative from the following:

(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.
Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).

Explanation:
To correct the situation of deficient demand RBI will reduce repo rate. Banks in turn will reduce lending rate of interest, so there will be more demand for loAnswer: This will increase money supply and correct the situation of deficient demand.

Question 4.

Which other monetary policy instrument the RBI cannot use?

(A) Open Market Operations
(B) Cash Reserve Ratio
(C) Margin Requirement
(D) Deficit Financing
Answer:
(D) Deficit Financing

Explanation:
Deficit financing is an instrument of fiscal policy.

MCQ Questions for Class 12 Economics with Answers