Income Determination Class 12 Economics Notes and Questions

Notes Class 12 Revision Notes

Please refer to Income Determination Class 12 Economics notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Economics books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Economics Income Determination Notes and Questions

Q.1 Why can the value of MPC be not greater than 1?
Ans. It is because change in consumption can never be greater than change in income.

Q.2 Does an excess of AD over AS always imply a situation of inflationary gap?
Ans. No. Inflationary gap occurs only when AD>AS corresponding to full employment level of employment.

Q.3 What happens if AD>AS prior to full employment level of employment?
Ans. It is a state of disequilibrium in economics. When AD>AS , producers have to cater to demand out of their existing stock of goods , implying that the desired level of stocks will decrease. It implies greater production & therefore there is increase in AS .This process continues till equilibrium is struck between AD and AS.

Q.4 In poor countries like India , people spend a high percentage of their income so that APC and MPC are high . Yet , value of multiplier is low . Why?
Ans. Working of the multiplier process is based on one fundamental assumption: that there exists, excess capacity in the economy , so that whenever consumption expenditure rises (implying increase in demand ) there is a corresponding increase in production (implying increase in income ) . But poor countries like India, lack in production capacity. Accordingly, whenever demand increases (in terms of increase in consumption expenditure), there is increasing pressure of demand on the existing output (implying inflation or rise in prices) rather than the increase in output or income.

Q.5 Show a point on the consumption curve at which APC= 1.
Ans. APC = C/Y =1 is possible if C=Y, i.e. Consumption is equal to Income.

Important Questions for Class 12 Economics Income Determination

Q.6 In what respect foreign trade will be useful in removing the adverse economic effects of deficient demand?
Ans. Export increases the demand for goods and services produced in the domestic territory and is helpful to reduce deficient demand.

Q.7 What happens in an economy, when credit availability is restricted and credit is made costlier?
Ans. Aggregate demands falls.

(Some important HOTS Questions with hint)

Q.1 Draw a diagram of straight line saving curve for an economy? From it derive the consumption curve explaining the method of derivation. Show a point of the consumption curve at which average propensity is equal to one.
Hint (Explain the process of drawing consumption curve from saving curve, APC is equal to one at break even points)

Q.2 Due to situation of COVID-19 economy is facing the problem of unemployment. Suggest any three ways to remove this problem from the economy
Hint ( write measures to control defilation in an economy, fiscal and monetary measures)

Q.3 what will be the value of investment multiplier if entire additional income is converted into additional consumption?
Ans: Hint (Infinity, use example to prove)

Q.4 Find out the level of ex-ante aggregate demand from the following information
Autonomous investment 25 crore
Autonomous consumption expenditure 25 crore, MPS 0.2 Level of income 5,000 crore
State whether the economy is in equilibrium or not .Give reason for your answer.

Ans: Hint (AD=4050. AD is less than AS so economy is not in equilibrium)

Q.5 If MPC and MPS are equal what is the value of multiplier.


“If MPC and MPS are equal, increase in income will be two times the increase in investment “explain.
Ans: Hint (MPS and MPC both will be 0.5)

Q.6 In an economy 20% of increase in income is saved if 500 crores are invested find out increase in income and consumption.
Ans: Hint (Income 2500cr& consumption2000cr)
Q7 Name the situation under which equilibrium level of expenditure exceeds planned aggregate expenditure.
Ans: Hint (Deficient demand)
Q.8 State the treatment of following measures by Central Bank during deficient demand
i) CRR
ii) Bank rate
iii) Open market operations
iv)Margin requirements.

Ans: Hint i)CRR will decrease,
ii) bank rate will decrease,
iii) Central bank starts purchasing the securities in the open market.
IV) Margin requirement will be decreased

Q.9 ) State whether the following statements are true or false give reasons for your answer
i) Inflation is always harmful for economy
ii) Low and stable rate of inflation may be beneficial to an economy
iii) Inflation or deflation can be caused only by natural factors
iv) During deficient demand the central bank aims at increasing the cost of borrowing money.

Ans: Hint i) False ii) True iii) False iv) False

Q.10 The consumption function of an economy is given as C=120+0.7Y. Derive saving function from consumption function and calculate saving at the income level of Rs.5000 crores
Ans Hint (Saving function S= -120+0.3Y: Saving 1380 crores)

Q11) In an economy C=500+0.75Y and I=800. Calculate the following
i) Equilibrium level of Income
ii) Consumption Expenditure at equilibrium level of income

Ans Hint( Y=C+I, C=500+0.75Y+800 , Y=5200 ,comp exp=4400)

Q12) In an economy expenditure is increased by 400 cr MPC is 0.8 . calculate total increase in income and saving.
Ans Hint( K=5 ,change in investment=400,change in Y 2000, Increase in saving=400cr)

Income Determination Class 12 Economics

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