✓ Board-verified
Economics · 2026 · 6 marks
Determination of Income and EmploymentDetermination of Equilibrium Income in the Short Run6 marksAnalyselong answer
CBSE 2026 · Region 5 · Set 2 · Q17
(a) Assuming for a hypothetical economy, the following data is given: Income (Y) Consumption (C) Investment (I) Aggregate Demand (AD) 0 20 20 40 100…
Assuming for a hypothetical economy, the following data is given :
| Income (Y) | Consumption (C) | Investment (I) | Aggregate Demand (AD) |
| $\displaystyle 0$ | $\displaystyle 20$ | $\displaystyle 20$ | $\displaystyle 40$ |
| $\displaystyle 100$ | $\displaystyle 100$ | $\displaystyle 20$ | – |
| $\displaystyle 200$ | $\displaystyle 180$ | $\displaystyle 20$ | – |
| $\displaystyle 300$ | $\displaystyle 260$ | $\displaystyle 20$ | $\displaystyle 280$ |
(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 300.
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 ₹ $\displaystyle 5$ in the National Income.
Calculate the following :
(i)
Value of Investment Multiplier (K).
(ii)
Change in consumption expenditure, if income changes from ₹ $\displaystyle 300$ to ₹ 400.
(iii)
“Sum of Average Propensity to Consume (APC) and Average Propensity to Save (APS) 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) |
| $\displaystyle 0$ | $\displaystyle 20$ | $\displaystyle 20$ | $\displaystyle 40$ |
| $\displaystyle 100$ | $\displaystyle 100$ | $\displaystyle 20$ | $\displaystyle 120$ |
| $\displaystyle 200$ | $\displaystyle 180$ | $\displaystyle 20$ | $\displaystyle 200$ |
| $\displaystyle 300$ | $\displaystyle 260$ | $\displaystyle 20$ | $\displaystyle 280$ |
(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 $\displaystyle 300$ level of Income (Y), Aggregate Demand (AD) is less than the Aggregate Supply (AS).
When ex-ante Aggregate Demand is less than ex-ante Aggregate Supply, it means that the households and firms are planning to consume less than what the firms are planning to produce. Thus, the inventories with the producers will rise above the desired level. As a result, the producers may decrease the output to clear the undesired 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) = ₹ $\displaystyle 5$
Investment Multiplier (K) $\displaystyle = \dfrac{\Delta Y}{\Delta I} = \dfrac{5}{1} = 5$
(ii)
Given, Income (Y) changes from ₹ $\displaystyle 300$ to ₹ $\displaystyle 400$
Change in Income (ΔY) = $\displaystyle 100$
Investment Multiplier (K) $\displaystyle = \dfrac{1}{1 - \text{MPC}}$
$\displaystyle 5 = \dfrac{1}{1 - \text{MPC}}$
MPC = $\displaystyle 0.8$
As we know, MPC $\displaystyle = \dfrac{\Delta C}{\Delta Y}$
Change in Consumption (ΔC) = $\displaystyle 0.8$ × $\displaystyle 100$
= ₹ $\displaystyle 80$(iii) We know that, Income earned may either be consumed or saved, i.e.;
Y = C + S
Dividing both sides of the above equation by Y
$\displaystyle \dfrac{Y}{Y} = \dfrac{C}{Y} + \dfrac{S}{Y}$
$\displaystyle 1$ = APC + APS
Thus, the sum of Average Propensity to Consume (APC) and Average Propensity to Save (APS) is always equal to one.
All Determination of Income and Employment questions2026 question paperPractice Determination of Income and Employment →
More from Determination of Income and Employment
- At the break-even point level of incomes for the economy is ₹ 10,000 crores and if the people tends to save 20 per cent of their additional income,…2022
- Calculate the Equilibrium level of Income for an imaginary economy, if it is given that: Saving function, S = (–)500 + 0·2 Y where S = Savings, Y =…2022
- State and discuss any one component of Aggregate Demand in a two-sector economy.2022
- 'Investment multiplier and Marginal Propensity to Save are indirectly related to each other.' Explain with the help of numerical example.2022
- “In an economy, ex-ante Aggregate Supply is more than ex-ante Aggregate Demand.” Explain its impact on the level of output, income and employment. OR…2024
- Identify which of the following equations is true. (Choose the correct alternative)2023
- Suppose in an economy, planned spendings are greater than planned outputs. Identify the correct option with respect to effects on the economy: (i)…2025
- Assuming for a hypothetical economy: (i) Autonomous Consumption Expenditure ( c̄ ) = ₹ 250 crore (ii) Marginal Propensity to Save (MPS) = 0·2 (iii)…2025
CBSE Class 12 Economics past-paper question from the 2026 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.