✓ Board-verified
Economics · 2026 · 4 marks
Determination of Income and EmploymentDetermination of Equilibrium Income in the Short Run4 marksApplyshort answer
CBSE 2026 · Region 4 · Set 2 · Q15
(a) Explain the adjustment mechanism, if in an economy, ex-ante Aggregate Demand (AD) is less than ex-ante Aggregate Supply (AS).
(a)
Explain the adjustment mechanism, if in an economy, ex-ante Aggregate Demand (AD) is less than ex-ante Aggregate Supply (AS).
OR
(a)
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 ₹ $\displaystyle 2,500$ crore.
Marking-scheme solution
When ex-ante Aggregate Demand (AD) is less than ex-ante Aggregate Supply (AS), 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.
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 ₹ $\displaystyle 2,500$ 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) |
| $\displaystyle 1$ | $\displaystyle 2,500$ | $\displaystyle 2,500$ | $\displaystyle 2,000$ | $\displaystyle 500$ |
| $\displaystyle 2$ | — | $\displaystyle 2,000$ | $\displaystyle 1,600$ | $\displaystyle 400$ |
| $\displaystyle 3$ | — | $\displaystyle 1,600$ | . | . |
| — | — | . | . | . |
| Total | $\displaystyle 2,500$ | $\displaystyle 12,500$ | $\displaystyle 10,000$ | $\displaystyle 2,500$ |
Thus, an increase in investment (∆I) of $\displaystyle 2,500$ leads to a total increase in national income (∆Y) by $\displaystyle 12,500$, which is $\displaystyle 5$ times the increase in investment.
Investment Multiplier $\displaystyle = \dfrac{1}{1-\text{MPC}} = \dfrac{1}{1-0.8} = 5$
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
- Assuming for a hypothetical economy, the following data is given: Income (Y) Consumption Investment (I) Aggregate Demand (AD) 0 20 20 40 100 100 20 –…2026
- “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
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.