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Economics · 2024 · 4 marks
Determination of Income and EmploymentDetermination of Income in Two-sector Model4 marksApplyshort answer
CBSE 2024 · Region 1 · Set 3 · Q13
(a) “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.
“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.
Complete the following table. Construct/Express the Consumption function at ₹ $\displaystyle 200$ crore level of income.
| Income (Y) (in ₹ crore) | Savings (in ₹ crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (–) $\displaystyle 30$ | – | – |
| $\displaystyle 100$ | ………… | $\displaystyle 1$ | ………… |
| $\displaystyle 200$ | ………… | $\displaystyle 0$·$\displaystyle 85$ | ………… |
| $\displaystyle 300$ | ………… | $\displaystyle 0$·$\displaystyle 8$ | ………… |
Marking-scheme solution
In an economy, if ex-ante Aggregate Supply is more than ex-ante Aggregate Demand, it implies that households are planning to consume less than what the firms expected them to. This will lead to an unintended rise in inventories. To restore the desired level of inventories, producers may plan to reduce production. As a result, there may be a decrease in the level of output, employment and income in the economy.
| Income (Y) (in ₹ Crore) | Saving (in ₹ Crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (-) $\displaystyle 30$ | - | - |
| $\displaystyle 100$ | $\displaystyle 0$ | $\displaystyle 1$ | $\displaystyle 0.3$ |
| $\displaystyle 200$ | $\displaystyle 30$ | $\displaystyle 0.85$ | $\displaystyle 0.3$ |
| $\displaystyle 300$ | $\displaystyle 60$ | $\displaystyle 0.8$ | $\displaystyle 0.3$ |
Consumption function, $\displaystyle C = \bar{c} + bY$
$\displaystyle C = 30 + 0.7Y$
Alternate answer: Consumption at ₹ $\displaystyle 200$ crore level of income = ₹ 170.
Working Note:
At an income level of ₹ $\displaystyle 200$ crore, Marginal Propensity to Save (MPS) = $\displaystyle 0.3$ and Marginal Propensity to Consume (MPC) = $\displaystyle 1$ - MPS ⇒ $\displaystyle 1$ - $\displaystyle 0.3$ = $\displaystyle 0.7$
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CBSE Class 12 Economics past-paper question from the 2024 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.