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Economics · 2026 · 4 marks
Determination of Income and EmploymentDetermination of Income in Two-sector Model4 marksApplyshort answer
CBSE 2026 · Region 4 · Set 3 · Q13
(a) Explain the adjustment mechanism, if in an economy, ex-ante Savings are more than ex-ante Investments.
(a)
Explain the adjustment mechanism, if in an economy, ex-ante Savings are more than ex-ante Investments.
OR
(b)
Explain the process of working of Investment Multiplier, for a hypothetical economy with Marginal Propensity to Consume (MPC) as $\displaystyle 0$·$\displaystyle 8$ and Incremental Investment as ₹ $\displaystyle 3,000$ crore.
Marking-scheme solution
When ex-ante savings are more than ex-ante investments, it means households are planning to consume less than what the firms expected them to consume. This will lead to unintended accumulation of inventories. To bring back the inventory to the desired level, producers may intend to decrease production in the economy. This mechanism will continue till the equilibrium is attained.
The working process of the Investment Multiplier increase in investment on the National Income, is based on the assumption that one's expenditure is another's income.
For the given hypothetical economy, the change in investment is of ₹ $\displaystyle 3,000$ crore Marginal Propensity to Consume (MPC) is 0.8.
| Round | Increase in investment (ΔI) (₹ in crore) | Increase in income (ΔY) (₹ in crore) | Increase in consumption (ΔC) (₹ in crore) | Increase in savings (ΔS) (₹ in crore) |
| $\displaystyle 1$ | $\displaystyle 3,000$ | $\displaystyle 3,000$ | $\displaystyle 2,400$ | $\displaystyle 600$ |
| $\displaystyle 2$ | — | $\displaystyle 2,400$ | $\displaystyle 1,920$ | $\displaystyle 480$ |
| $\displaystyle 3$ | — | $\displaystyle 1,920$ | . | . |
| — | — | . | . | . |
| Total | $\displaystyle 3,000$ | $\displaystyle 15,000$ | $\displaystyle 12,000$ | $\displaystyle 3,000$ |
Thus, an increase in investment (ΔI) of $\displaystyle 3,000$ leads to a total increase in national income (ΔY) by $\displaystyle 15,000$, which is $\displaystyle 5$ times the increase in investment.
Investment Multiplier = $\displaystyle \frac{1}{1-\text{MPC}}$
$\displaystyle = \frac{1}{1-0.8} = 5$
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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.