NCERT Solutions for Class 12 Macro Economics Chapter 4 – Determination of Income and Employment
NCERT Solutions for Class 12 Macro Economics Chapter 4 – Determination of Income and Employment
NCERT Solutions are invaluable resources for students preparing for the CBSE Class 12 Economics Board examinations. These solutions are meticulously compiled by subject matter experts with extensive experience in the field. This chapter serves as a brief of Determination of Income and Employment
Access NCERT Solutions for Class 12 Economics Chapter 4 – Determination of Income and Employment
NCERT Macroeconomics Solutions Class 12 Chapter 4 – Determination of Income and Employment
Textual Questions and Answers
Q. 1. What is marginal propensity to consume? How is it related to marginal propensity to save?
Ans.
Great! Let’s break this down in a way that would be easy to grasp.
Marginal Propensity to Consume (MPC)
Marginal Propensity to Consume, or MPC, measures how much more an individual will spend with each additional unit of income they earn. Simply put, it’s the proportion of additional income that gets spent rather than saved.
For example, if someone receives an extra ₹100, and they spend ₹80 of it, then their MPC would be 0.8 (because 80/100 = 0.8).
Marginal Propensity to Save (MPS)
Marginal Propensity to Save, or MPS, on the other hand, measures how much more an individual will save with each additional unit of income they earn. In simple terms, it’s the proportion of additional income that gets saved rather than spent.
Using the same example, if someone receives an extra ₹100, and they save ₹20 of it, then their MPS would be 0.2 (because 20/100 = 0.2).
Relationship between MPC and MPS
MPC and MPS are directly related and together, they always add up to 1. This is because any additional income earned is either spent or saved.
Using our example again:
- If MPC = 0.8
- Then, MPS = 1 – 0.8 = 0.2
In other words:
MPC + MPS = 1
This simple relationship helps economists understand consumer behavior and predict how changes in income will affect overall spending and saving in the economy.
Q. 2. What is the difference between ex ante investment and ex post investment?
Ans.
Certainly! Let’s break down the differences between ex ante investment and ex post investment in a straightforward way.
Ex Ante Investment
- Definition: Ex ante investment refers to the planned or expected level of investment that businesses or individuals intend to make in the economy in the future. It’s based on forecasts, predictions, and intentions before the actual investment takes place.
- Example: Suppose a company plans to invest ₹50 lakh in setting up a new factory based on their market predictions and future profit expectations. This ₹50 lakh represents their ex ante investment.
Ex Post Investment
- Definition: Ex post investment, on the other hand, refers to the actual amount of investment that has been made in the economy. It’s the realized or actual investment that occurs over a period.
- Example: Continuing with our previous example, if the company ends up investing ₹45 lakh instead of the planned ₹50 lakh due to changes in market conditions, then the ₹45 lakh is their ex post investment.
Key Differences
- Timing: Ex ante investment is based on plans and predictions before the investment occurs, while ex post investment is based on actual investment made after the event.
- Data Basis: Ex ante investment relies on forecasts and intentions, whereas ex post investment is based on real data and actual transactions.
- Adjustments: Ex ante investment may change due to unforeseen factors or changes in the economic environment, leading to a difference between planned and actual investment.
Summary Table
| Aspect | Ex Ante Investment | Ex Post Investment |
|---|---|---|
| Definition | Planned or intended investment | Actual realized investment |
| Timing | Before the investment takes place | After the investment takes place |
| Data Basis | Forecasts and predictions | Real data and actual transactions |
| Adjustments | Subject to changes due to unforeseen factors | Reflects actual outcome |
I hope this helps you understand the difference between ex ante and ex post investment. If you have any more questions or need further clarification, feel free to ask!
Q. 3. What do you understand by ‘parametric shift of a line’? How does a line shift when its (i) slope decreases, and (ii) its intercept increases?
Ans.
Q. 4. What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?
Ans.
Sure! Let’s break this down step-by-step.
Effective Demand
Effective demand refers to the total demand for goods and services in an economy at different levels of employment. It’s the level of demand that is actually backed by the ability to pay for goods and services, leading to the actual production and employment in the economy. Effective demand is determined where aggregate demand (total spending in the economy) equals aggregate supply (total output in the economy).
Autonomous Expenditure Multiplier
The autonomous expenditure multiplier measures the effect of a change in autonomous expenditures (such as government spending, investment, or exports) on the overall level of income or output in the economy. Here’s how you derive it:
(1) Aggregate Demand (AD) Function: The aggregate demand function can be represented as:
AD = C + I + G + (X – M)
Where:
- C = Consumption
- I = Investment
- G = Government spending
- X = Exports
- M = Imports
(2) Consumption Function:
The consumption function can be written as:
C = a + bY
Where:
- ( a ) = Autonomous consumption (consumption when income is zero)
- ( b ) = Marginal propensity to consume (MPC)
- ( Y ) = National income
(3) Autonomous Expenditures:
Let’s denote the total autonomous expenditures (sum of autonomous consumption, investment, government spending, and net exports) as A. So, the aggregate demand function becomes:
AD = A + bY
(4) Equilibrium Condition:
In equilibrium, aggregate demand equals aggregate supply, which is represented by national income Y:
Y = AD
Therefore,
Y = A + bY
(5) Deriving the Multiplier:
To find the equilibrium level of income, we can rearrange the equation:
Y – bY = A
Y(1 – b) = A
Y = A/1 – b
Here, 1/1 – b is the autonomous expenditure multiplier, often represented as k.
So, the autonomous expenditure multiplier k is:
k = 1/1 – b
This tells us that for a given change in autonomous expenditures (A), the change in national income (Y) will be:
(Y) = k . A
Given Price and Interest Rate:
When the price of final goods and the rate of interest are given, they are considered constant in this context. Therefore, the consumption function and the aggregate demand function do not directly depend on these variables, making the autonomous expenditure multiplier unaffected by them in this simple Keynesian framework.
Q. 5. Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4000 crores. State whether the economy is in equilibrium or not (cite reasons).
Ans.
Q. 6. Explain ‘Paradox of Thrift’.
Ans.
Of course! Let’s dive into the Paradox of Thrift and make it easy to understand.
Paradox of Thrift
The Paradox of Thrift is a concept in economics that suggests that while saving money is generally considered good for an individual, if everyone in an economy starts saving more and spending less, it can lead to a decrease in overall economic activity. This can actually harm the economy and lead to a decrease in total savings.
How it Works
- Increased Savings: When individuals decide to save more money, they spend less on goods and services.
- Decreased Consumption: As a result, businesses experience a drop in demand for their products and services.
- Reduced Income and Employment: With lower demand, businesses may cut back on production, leading to layoffs and reduced income for workers.
- Lower Overall Savings: With reduced income and higher unemployment, people have less money to save, which leads to lower overall savings in the economy.
Why is it a “Paradox”?
It’s called a paradox because what is beneficial at the individual level (increased savings) can lead to negative outcomes at the macroeconomic level (reduced income and lower overall savings). In other words, if everyone tries to save more simultaneously, it can result in an overall reduction in economic welfare.
Example
Imagine an economy where everyone decides to save more money for the future. People cut back on spending, businesses see lower sales, production slows down, and workers are laid off. With less income, people end up saving less than they initially intended, which contradicts the original goal of increasing savings.
Key Takeaway
The Paradox of Thrift highlights the importance of balanced spending and saving in an economy. While saving is crucial for individual financial security, excessive saving at the expense of consumption can lead to economic downturns and reduced savings overall.
I hope this explanation helps! If you have any more questions or need further clarification, feel free to ask.
