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Economics · 2026 · 6 marks
Determination of Income and EmploymentDetermination of Equilibrium Income in the Short Run6 marksAnalyselong answer
CBSE 2026 · Region 5 · Set 1 · Q16
Assume, for a hypothetical economy, the following data is given :Income (Y) Consumption (C) Investment (I) Aggregate Demand (AD) $\displaystyle 0$ $\displaystyle 40$ $\displaystyle 20$ $\displaystyle 60$ $\displaystyle 100$ $\displaystyle 120$ $\displaystyle 20$ – $\displaystyle 200$ $\displaystyle 200$ $\displaystyle 20$ – $\displaystyle 300$ $\displaystyle 280$ $\displaystyle 20$ $\displaystyle 300$
(i)Calculate the missing values in the given schedule.(ii)Define the term ‘Effective Demand’.(iii)On the basis of the given data, it can be said that the equilibrium level of income is 200.Do you agree ? If not, explain the adjustment mechanism that may take place to attain equilibrium level of income.Suppose, in an economy, every ₹ $\displaystyle 1$ increase in investment expenditure leads to an increase of ₹ $\displaystyle 4$ in the National Income.Calculate the following :(i)Value of Investment Multiplier (K).(ii)Change in consumption expenditure, if the income changes from ₹ $\displaystyle 400$ to ₹ 500.(iii)“Sum of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is always equal to one.”Justify the given statement with the help of a suitable argument.
Assume, for a hypothetical economy, the following data is given :
| Income (Y) | Consumption (C) | Investment (I) | Aggregate Demand (AD) |
| $\displaystyle 0$ | $\displaystyle 40$ | $\displaystyle 20$ | $\displaystyle 60$ |
| $\displaystyle 100$ | $\displaystyle 120$ | $\displaystyle 20$ | – |
| $\displaystyle 200$ | $\displaystyle 200$ | $\displaystyle 20$ | – |
| $\displaystyle 300$ | $\displaystyle 280$ | $\displaystyle 20$ | $\displaystyle 300$ |
(i)
Calculate the missing values in the given schedule.
(ii)
Define the term ‘Effective Demand’.
(iii)
On the basis of the given data, it can be said that the equilibrium level of income is 200.
Do you agree ? If not, explain the adjustment mechanism that may take place to attain equilibrium level of income.
Suppose, in an economy, every ₹ $\displaystyle 1$ increase in investment expenditure leads to an increase of ₹ $\displaystyle 4$ in the National Income.
Calculate the following :
(i)
Value of Investment Multiplier (K).
(ii)
Change in consumption expenditure, if the income changes from ₹ $\displaystyle 400$ to ₹ 500.
(iii)
“Sum of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is always equal to one.”
Justify the given statement with the help of a suitable argument.
Marking-scheme solution
(i)
| Income (Y) | Consumption (C) | Investment (I) | Aggregate Demand (AD) |
| $\displaystyle 0$ | $\displaystyle 40$ | $\displaystyle 20$ | $\displaystyle 60$ |
| $\displaystyle 100$ | $\displaystyle 120$ | $\displaystyle 20$ | $\displaystyle 140$ |
| $\displaystyle 200$ | $\displaystyle 200$ | $\displaystyle 20$ | $\displaystyle 220$ |
| $\displaystyle 300$ | $\displaystyle 280$ | $\displaystyle 20$ | $\displaystyle 300$ |
(ii)
Effective Demand refers to that level of Aggregate Demand (AD) which can be met by the corresponding Aggregate Supply (AS) in the economy.
(iii)
No. At $\displaystyle 200$ level of Income (Y), Aggregate Demand (AD) is greater than the Aggregate Supply (AS).
When ex-ante Aggregate Demand is more than ex-ante Aggregate Supply, it means that the households and firms are planning to consume more than what the firms are planning to produce. Thus, the inventories with the producers will fall below the desired level. As a result, the producers may increase the output to restore the desired stock of inventories till the equilibrium level of output is attained.
(i)
Given, Change in Investment Expenditure (ΔI) = ₹ $\displaystyle 1$
Change in National Income (ΔY) = ₹ $\displaystyle 4$
Investment Multiplier (K) = $\displaystyle \frac{\Delta Y}{\Delta I} = \frac{4}{1} = 4$
(ii)
Given, Income (Y) changes from ₹ $\displaystyle 400$ to ₹ $\displaystyle 500$
Change in Income (ΔY) = $\displaystyle 100$
Investment Multiplier (K) = $\displaystyle \frac{1}{1-\text{MPC}}$
$\displaystyle 4 = \frac{1}{1-\text{MPC}}$
MPC = $\displaystyle 0.75$
As we know, MPC = $\displaystyle \frac{\Delta C}{\Delta Y}$
Change in Consumption (ΔC) = $\displaystyle 0.75$ × $\displaystyle 100$
= ₹ $\displaystyle 75$(iii) We know that, Income earned may either be consumed or saved, i.e.;
Y = C + S
Change in Income (ΔY) = Change in Consumption (ΔC) + Change in Savings (ΔS)
ΔY = ΔC + ΔS
Dividing both sides of the above equation by Δ Y
$\displaystyle \frac{\Delta Y}{\Delta Y} = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y}$
$\displaystyle 1$ = MPC + MPS
Thus, the sum of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is always equal to one.
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CBSE Class 12 Economics past-paper question from the 2026board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.