Q Case study (1 – 4)
Due to the Covid- 19 situation, there has been a fall in the savings of the people, and they are spending the savings. This has led to the consumption to be done by the reduction of the savings. To control the situation, the government has announced various stimulus packages to revive the economy and proving employment through road and railway building projects. Still, the desired savings or ex-ante savings that are required for the functioning of the economy has been reduced. It is seen that the private consumption expenditure, private investment expenditure, and ex-ante savings have reduced the aggregate demand in the economy.
(1) Desired saving during an accounting year is called:
(I) Ex- ante saving
(ii) Ex- post saving
(iii) Actual saving
(iv) None of these
Ans. Ex- ante saving
(2) The fall in the savings is due to:
(I) Decrease in income
(ii) Increase in consumption
(iii) Increase in government expenditure
(iv) Using savings for consumption
Ans. Using savings for consumption
(3) What other options does the RBI have to increase the savings and consumption in the economy?
(I) Increasing Reverse Repo Rate
(ii) Decrease in the Repo Rate
(iii) Open Market Operations
(iv) Increase in Repo rate.
Ans. Increase in Repo Rate
4. The ratio of total consumption expenditure to total income is called ________________
(i) MPS
(ii) MPC
(iii) APC
(iv) APS
Ans. MPC
Case study (5 – 7)
In an economy, Aggregate Demand is determined by consumption, government Expenditure, and Net Exports in the Economy. This is affected by the Savings and Investment in the Economy. The Multipliers, that is investment multiplier, which is influenced the Aggregate Demand and Supply. Any change in any of the factors leads to a big change in the economy’s equilibrium as a whole.it is to be kept in mind that the economy needs to be in equilibrium condition mostly. When savings are less than the investments the aggregate demand is more than the aggregate supply, and vice versa.
5. In a situation of S< I:
(i) fall in expenditure through ‘S’ < rise in expenditure through ‘I’
(ii) fall in expenditure through ‘S’ > rise in expenditure through ‘I’
(iii) AD > AS
(v) Both (i) and (iii)
Ans. Both (i) and (iii)
6. The multiplier is affected by
(i) Income and consumption
(ii) Savings and consumption
(iii) Expenditure and Exports
(iv) Income and Expenditure
Ans. Income and consumption
7. Aggregate Demand is the sum total of:
(i) Consumption
(ii) Expenditure by Government
(iii) Net Exports
(iv) All of the Above
Ans. All of the above
Case study (8 – 11)
Aggregate Demand refers to the total demand for all goods and services in the economic system as a whole at a given income level. This is expressed in terms of Total Expenditure made in the economy. In an open economy, constituents of AD are Consumption Expenditure, Investment Expenditure, Government Expenditure, and Net Exports.
Equilibrium position may be of full employment or may not be of full employment. It only determines the level of income. Therefore, for full employment, we have to twist AD or AS. But AS depends on technological factors therefore if AD increases, it will raise the level of employment.
The size of the multiplier is determined by the Marginal Propensity to consume. There is a direct relation between MPC and K Higher the MPC, the higher is the value of K and vice- versa.
8. AD schedule shows the relationship between:
(i) AD and Y
(ii) AD and AS
(iii) C and S
(iv) All of these
Ans. AD and Y
9. AD increases, ___________ increases.
(i) Employment
(ii) Unemployment
(iii) AS
(iv) Multiplier
Ans. Employment
10. The relation between K and MPC is
(i) Indirect
(ii) Direct
(iii) No relation
(iv) it depends on Income
Ans. Direct
11. Equilibrium position may be of full employment or may not be of full employment, and only determines the level of _____________.
(i) Income
(ii) Consumption
(iii) Saving
(iv) Investment
Ans. Income
Case study (12 – 15)
The economy is said to be in equilibrium when the aggregate demand is equal to the aggregate supply.
To maintain the equilibrium level the Reserve Bank of India uses its credit creation tools like bank rate, open market operations, CRR, SLR, etc to increase or decrease the aggregate demand so that it reaches the level of aggregate supply to bring the economy back to the equilibrium point. These credit control policies help the commercial bank to create credit through deposits and loans and reserves.
When the aggregate demand is greater the inventories fall, so the government needs to decrease the consumption and increase its expenditure of production and the RBI needs to decrease the money supply with the help of the Commercial Bank. The reverse happens in the case when aggregate demand is lesser than the aggregate supply.
12. When aggregate demand is greater than aggregate supply inventories.
(i) Fall
(ii) rise
(iii) do not change
(iv) the first fall, then rise
Ans. (ii) rise
13. Aggregate demand can be increased by:
(i) increasing bank rate
(ii) selling government securities by Reserve Bank of India
(iii) increasing cash reserve ratio
(iv) none of the above
Ans. (iv) none of the above
14. If the aggregate demand rises, the government needs to:
(i) Decrease Consumption
(ii) Decrease Expenditure
(iii) Decrease Taxes
(iv) All of the above
Ans. (iv) All of the above
15. Credit creation in commercial banks is determined by:
(i) Cash Reserve Ratio
(ii) Statutory Liquidity Ratio
(iii) Initial Deposits
(iv) All of the above
Ans. (iv) All of the above
Case study (16 – 19 )
Full Employment refers to a situation, where all those workers who can work and willing to work get employment at the prevailing wage rate. True full employment is an ideal and probably unachievable situation in which anyone willing and able to work can find a job. The equilibrium position described above may be of full employment or may not be of full employment. It only determines the level of income. Therefore, for full employment, we have to twist AD or AS. But AS depends on technological factors therefore if AD increases, it will raise the level of employment and be in equilibrium without excess capacity AD = AS.
But to achieve full employment is not possible and is just an ideal state. There is a situation called involuntary unemployment, that is, when the person wanting to work is jobless, which adds to the problem for an economy to reach the full employment level. As employment can be increased by increasing Aggregate Demand, that is, when the RBI decrease the bank rate or purchase securities in the open market, but this does not affect involuntary employment.
For full employment there needs to be the fuller utilization of resources, that is the economy needs to be in equilibrium without excess capacity.
16. What is the situation when AS = AD along with fuller utilization of resources in the economy called?
(i) Equilibrium with excess capacity
(ii) Equilibrium without excess capacity
(iii) Equilibrium with excess income
(iv) Equilibrium with excess consumption.
Ans. (ii) Equilibrium without excess capacity
17. Aggregate demand can be decreased by:
(i) Rise in Bank Rate
(ii) Purchase of securities in Open Market
(iii) Deficit Budget
(iv) Reduction in Tax burden
Ans. (i) Rise in Bank Rate
18. Aggregate demand refers to ______________ on domestically produced goods and services during the period of an accounting year.
(i) Planned expenditure
(ii) Unplanned expenditure
(iii) Planned consumption
(iv) Unplanned Consumption
Ans. (i) Planned expenditure
19. Give the meaning of involuntary unemployment.
(i) When people who are able but not willing to work at the prevailing wage rate, do not get employment, it is a situation of involuntary unemployment.
(ii) When people who are able and willing to work at the prevailing wage rate, do not get employment, it is the situation of involuntary unemployment.
(iii) When people who are not able but are willing to work at the prevailing wage rate, do not get employment, it is a situation of involuntary unemployment.
(iv) When people who are neither able nor willing to work at the prevailing wage rate, do not get employment, it is a situation of involuntary unemployment.
Ans. (i) When people who are able but not willing to work at the prevailing wage rate, do not get employment, it is a situation of involuntary unemployment.
Case study (20- 23)
When AD falls short of AS at full employment, it is called deficient demand. Deficient Demand = AD < AS (at full employment level). When we see the Aggregate demand in the current situation of Covid- 19, the economy has the situation of deficient demand. This is not only due to the decrease in consumption, but also the investment and savings. Due to this, the economy has entered a cyclical recession and a lot of structural changes need to be done by the government to increase the Aggregate Demand in the economy. The Fact with a decline in Aggregate demand has led the Aggregate supply to remain stagnant and the planned output is not equal to the planned expenditure in the present situation. The government needs to take extra care in reviving the already declining economy or matters will be worse.
20. The constituents of Aggregate Demand are:
(i) Investment
(ii) Consumption
(iii) both (i) and (ii)
(iv) None of these
Ans. (iii) both (i) and (ii)
21. Level of planned output coincides with planned expenditure when:
(i) AD = AS
(ii) C = I
(iii) both (a) and (b)
(iv) none of these
Ans. (iii) both (a) and (b)
22. What do you mean by a Deflationary Gap?
(i) Deflationary gap is the situation where AD falls short of investment at full employment
(ii) Deflationary gap is the situation where AD falls short of AS at full employment
(iii) Deflationary gap is the situation where AS falls short of AD at full employment
(iv) Deflationary gap is the situation where AS falls short of investment at full employment.
Ans. (ii) Deflationary gap is the situation where AD falls short of AS at full employment
23. Correct the statement: Full employment means zero unemployment.
(i) Full employment means the level of unemployment is natural.
(ii) Full employment means cyclical and structural unemployment exists.
(iii) Full employment means the level of unemployment is minimum.
(iv) The statement is correct.
Ans. Full employment means cyclical and structural unemployment exists.
Case study (24-27)
The Consumer function is the most important in the computation of Aggregate Demand. It shows the relationship between consumption and income. When we calculate the change of consumption with regard to the different levels of income it is termed as the propensity to Consume, which can be marginal or average as per the change in income. Another component of Aggregate Demand is Investment. Investment is also dependent on Income level. The economy always tries to be at equilibrium, thus with the change in investment, there will be a change in other factors that affect the Aggregate Demand and supply.
24. What is the Average Propensity to Consume?
(i) The ratio of change in income to change in consumption.
(ii) The ratio of change in consumption to change in income.
(iii) The ratio of any level of income to consumption
(iv) The ratio of consumption to any level of income.
Ans. (iv) The ratio of consumption to any level of income.
25. What does consumption depend on?
(i) Income
(ii) Savings
(iii) Investment
(iv) Supply
Ans. (i) Income
26. Change in Investment affects ____________
(i) Aggregate Demand
(ii) Consumption
(iii) Savings
(iv) All of the above
Ans. (iv) All of the above
27. Investment depends on
(i) Income
(ii) Savings
(iii) Investment
(iv) Supply
Ans. (i) Income
Case Study (28- 30)
When we talk about aggregate demand and its components and how the short-term equilibrium is maintained, we need to consider the changes that occur in them. Investment Multiplier establishes the relation between investment and income. It measures the change in income due to a change in investment. Propensity to save and consume can determine the investment multiplier. The size of the multiplier is determined by the Marginal Propensity to Consume. There is a direct relation between MPC and K. Higher the MPC, the higher is the value of K and vice-versa. MPS can be calculated by subtracting MPC from 1. We also know that the multiplier is an inverse of MPS.
28. What do you mean by Average Propensity to Save?
(1) The ratio of saving to income
(ii) The Ratio of income to saving
(iii) The ratio of change in saving to income
(iv) The ratio of change in income to saving
Ans. (i) The ratio of saving to income
29. When MPS = 1, the value of investment multiplier is _______________
(i) 0
(ii) 1
(iii) 2
(iv) Can’t be determine
Ans. (ii) 1
30. If the value of MPS is 0.4. What will be the value of the investment multiplier?
(i) 3
(ii) 4
(iii) 2.5
(iv) 2
Ans. (iii) 2.5
Case Study (31 – 32)
The Aggregate Demand curve is the total of consumption expenditure, investment expenditure, government expenditure, and Net Exports, and indicated the planned or ex-ante demand. So all the consumption, investment, and savings functions influence aggregate demand. In the IS-LM model, the demand curve is derived from the Investment Savings curve and is influenced by the investment multiplier. The slope of the curve depends on the value of the multiplier as well.
31. Aggregate demand curve indicates __________________ demand in the economy.
(i) Ex- ante
(ii) Ex- Post
(iii) Initial
(iv) Final
Ans. (i) Ex-ante
32. Ex- post investment refers to _______________ in the economy during the period of one year.
(i) Actual
(ii) Desired
(iii) Planned
(iv) All of the above
Ans. (i) Actual