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Economics · 2024 · 4 marks
CBSE 2024 · Region 2 · Set 1 · Q14
(a) “If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an…
“If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an unintended accumulation of inventories.”
Do you agree with the given statement ? Give valid reasons in support of your answer.
Complete the following table. Construct the consumption function at ₹ $\displaystyle 200$ crore level of income.
| Income (Y) (in ₹ crore) | Savings (S) (in ₹ crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (–) $\displaystyle 50$ | – | – |
| $\displaystyle 100$ | …………… | $\displaystyle 1$ | …………… |
| $\displaystyle 200$ | …………… | $\displaystyle 3$/$\displaystyle 4$ | …………… |
| $\displaystyle 300$ | …………… | $\displaystyle 2$/$\displaystyle 3$ | …………… |
Marking-scheme solution
Yes. If the actual demand for final goods falls short of the actual output corresponding to full employment level, it implies that demand by all the consumers and firms is less than the level of output produced at full employment level. Consequently, it may lead to an increase in the stock of unsold goods lying with the firms. Thereby, it may lead to an unintended accumulation of inventories.
| Income (Y) (in ₹ Crore) | Saving (in ₹ Crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (-) $\displaystyle 50$ | - | - |
| $\displaystyle 100$ | $\displaystyle 0$ | $\displaystyle 1$ | $\displaystyle 0.5$ |
| $\displaystyle 200$ | $\displaystyle 50$ | $\displaystyle 3$/$\displaystyle 4$ | $\displaystyle 0.5$ |
| $\displaystyle 300$ | $\displaystyle 100$ | $\displaystyle 2$/$\displaystyle 3$ | $\displaystyle 0.5$ |
Consumption function, C = $\displaystyle \bar{c}$ + bY
C = $\displaystyle 50$ + $\displaystyle 0.5$ Y
Alternatively, consumption at ₹ $\displaystyle 200$ crore level of income = ₹ 150.
Working Note :
At an income level of ₹ $\displaystyle 200$ crore, Marginal Propensity to Save (MPS) = $\displaystyle 0.5$ and Marginal Propensity to Consume (MPC) = $\displaystyle 1$ - MPS ⇒ $\displaystyle 1$ - $\displaystyle 0.5$ = $\displaystyle 0.5$
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