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Economics · 2026 · 6 marks
Determination of Income and EmploymentDetermination of Income in Two-sector Model6 marksApplylong answer
CBSE 2026 · Region 2 · Set 1 · Q16
(A) (I) Estimate the value of subsistence level of consumption expenditure from the following data about an economy which is in equilibrium: (i)…
(I)
Estimate the value of subsistence level of consumption expenditure from the following data about an economy which is in equilibrium :
(i)
National Income (Y) = ₹ $\displaystyle 1,200$ crore
(ii)
Marginal Propensity to Save (MPS) = $\displaystyle 0.20$
(iii)
Investment Expenditure ($\displaystyle \bar{I}$) = ₹ $\displaystyle 100$ crore
(II)
“An economy facing an increase in unintended accumulation of inventories would try to reduce Aggregate Demand.”
Defend or refute the above statement with valid arguments.
(I)
Complete the following table :
| Situation | Change in Investment (ΔI) | Change in Income (ΔY) | Marginal Propensity to Consume (MPC) | Investments Multiplier (K) |
| (a) | $\displaystyle 200$ | (i) ______ | $\displaystyle 0.8$ | (ii) ______ |
| (b) | (iii) ______ | $\displaystyle 2000$ | (iv) ______ | $\displaystyle 4$ |
| (c) | $\displaystyle 1000$ | (v) ______ | $\displaystyle 0.5$ | (vi) ______ |
(II)
Identify the monetary measures being referred to in the following statements. Discuss whether the tool would be used during a situation of excess demand or deficient demand.
(i)
Selling off government securities (G-Sec) to public by the central bank.
(ii)
Encourage commercial banks to park their surplus funds with the Reserve Bank of India (RBI).
Marking-scheme solution
(I)
Given, National Income (Y) = ₹ $\displaystyle 1,200$ crore
Marginal Propensity to Save (MPS) = $\displaystyle 0.20$
Investment Expenditure ($\displaystyle \bar{I}$) = ₹ $\displaystyle 100$ crore
Marginal Propensity to Consume (MPC) = $\displaystyle 1$ – MPS
= $\displaystyle 1$ – $\displaystyle 0.2$
= $\displaystyle 0.8$As we know, at equilibrium level of income, Y = C + I
Y = $\displaystyle \bar{c}$ + (MPC)Y + $\displaystyle \bar{I}$
$\displaystyle 1,200$ = $\displaystyle \bar{c}$ + ($\displaystyle 0.8$ x $\displaystyle 1,200$) + $\displaystyle 100$
$\displaystyle \bar{c}$ = ₹ $\displaystyle 140$ crore
(II)
The given statement is refuted. An unintended accumulation of inventories reflects that the households and firms are planning to consume less than what the firms are planning to produce. Thus, the producers may reduce the output to clear the undesired stock of inventories.
(I)
| Situation | Change in Investment (ΔI) | Change in Income (ΔY) | Marginal Propensity to Consume (MPC) | Investments Multiplier (K) |
| (a) | $\displaystyle 200$ | $\displaystyle 1000$ | $\displaystyle 0.8$ | $\displaystyle 5$ |
| (b) | $\displaystyle 500$ | $\displaystyle 2000$ | $\displaystyle 0.75$ | $\displaystyle 4$ |
| (c) | $\displaystyle 1000$ | $\displaystyle 2000$ | $\displaystyle 0.5$ | $\displaystyle 2$ |
(II)
(i)
The monetary measure being referred to in the aforesaid statement is ‘Open Market Operations.’
The Central Bank sells the government securities in the open market to reduce the money supply in the economy and correct the situation of excess demand.
(ii)
The monetary measure being indicated in the above statement is Reverse Repo Rate.
To deal with the situation of excess demand the Reserve Bank of India (RBI) may increase the Reverse Repo Rate thereby reducing the lending capacity of the commercial banks, reducing the money supply and Aggregate Demand in the economy.
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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.