MP Board Class 12th Economics Unit 7 Determination of Income and Employment Important Questions

MP Board Class 12th Economics Important Questions Unit 7 Determination of Income and Employment with pdf file solutions.

Micro Economics Determination of Income and Employment Important Questions

Micro Economics Determination of Income and Employment Objective Type Questions

Question 1. Choose the correct answers:

Question 1. Income and employment are determined by:
(a) Total demand
(b) Total supply
(c) Total demand and total supply both
(d) By market demand.
Answer:
(c) Total demand and total supply both

Question 2. The relation between consumption and savings are:
(a) Inverse
(b) Direct
(c) Inverse and direct both
(d) Neither inverse nor direct.
Answer:
(a) Inverse

Question 3. When an economy their to save all its extra income then investment calculation will be:
(a) 1
(b) Uncertain
(c) 0
(d) Infinite.
Answer:
(a) 1

Question 4. “Supply creates it own demand”. This statement was given by the economist:
(a) Keynes
(b) Pigou
(c) J. B.Say
(d) Adam Smith.
Answer:
(c) J. B.Say

Question 5. Classical theory is based on the assumption of:
(a) Say’s law of market
(b) Flexibility in wage rates
(c) Flexibility in interest rate
(d) All of the above.
Answer:
(d) All of the above.

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MP Board Solutions

Questions 2. Fill in the blanks:

  1. ……………………. refers to highest rate of return over cost expected from marginal or additional unit of a capital asset.
  2. Deflationary gap is the measurement of ……………………. demand.
  3. Deficit demand indicates ……………………. gap.
  4. In case of excess demand bank rate …………………….
  5. Multiplier can also ……………………. in opposite direction.
  6. The point at which aggregate demand and aggregate supply are equal is known as …………………….
  7. Unemployment is the result of …………………….
  8. Propensity to consume shows relation between ……………………. and distributed income.

Answer:

  1. Marginal efficiency of capital
  2. Deficit
  3. Deflationary gap
  4. Increase
  5. Work
  6. Effective demand
  7. Deficit
  8. Consumption

Question 3. State true or false:

  1. Full employment does not mean zero unemployment.
  2. Increase in interest rate in future, will reduce the savings.
  3. Consumption expenditure does not increase in the same proportion as income increases.
  4. Theories of employment was propounded by Marshall.
  5. Unemployment is the result of deficit demand.
  6. Keynes theory also applies to underdeveloped countries.
  7. Keynes theory is based on the concept of full employment.

Answer:

  1. True
  2. False
  3. True
  4. False
  5. False
  6. False
  7. True.

Question 4. Match the following:

  1. Meaning of market demand (a) Directly related to each other
  2. Income and savings both (b) J.B. Say
  3. Independent Jurisdiction (c) Income is inelastic
  4. Induced investment (d) By the demand of one good
  5. Supply creates its own demand (e) Is ruled by
  6. Effective demand = Total demand and Total supply (f0 income is elastic

Answer:

  1. (d)
  2. (a)
  3. (c)
  4. (f)
  5. (b)
  6. (e).

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Question 5. Answer the following in one word / sentence:

  1. What will be the effect of multiplier, if multiplier leakage is high?
  2. Excess demand gives birth to?
  3. Which is the most appropriate measure to check deficit demand?
  4. Who propounded the deficit demand theory of unemployment?
  5. Name the interest theory propounded by Prof. Keynes.
  6. Which is the most effective measure to check it deficit demand?

Answer:

  1. Less
  2. Money inflation
  3. Increase in public expenditure
  4. Keynes
  5. Liquidity preference
  6. Increase in exports.

Determination of Income and Employment  Very Short Answer Type Questions

Question 1. What is the difference between actual investment and induced investment?
Answer:
Actual investment:
Actual investment refers to realizing investment. It is what the investors actually make at different levels of income and employment in the economy.

Induce investment:
Induce investment in that investment which depends on the expected profitability of level of income.

Question 2. hat is effective demand?
Answer:
Effective demand means that amount of money which people of a country spend on consumption and investment in a specific time. That level of demand is effective which is equal to aggregate supply. According to Keynes, “By point of aggregate demand at which the aggregate curve intersect the price at that point is called effective demand.”

Question 3. Explain voluntary and involuntary unemployment.
Answer:
Voluntary:
It signifies the situation where in all the person willing to work at existing rate of remuneration are getting employment.

Involuntary:
It refers to that situation where in all the persons are willing to work at existing rate of remuneration do not get employment. It signifies the state where the available resources are not fully utilized.

Question 4. Explain any two measures which can be taken to remove the excess demand (Write any two).
Answer:
Followings are the two measures to be taken to check the excess demand:
1. Bank rate:
The rate at which the central bank lends money to its member banks is called bank rate. In a situation of excess demand, the central bank should raise the bank rate.

2. Open market operations:
The buying and selling of government securities and bonds in the open market by the central bank are called open market operations. In the time of excess demand, central bank sells government securities to commercial banks or to their customers.

Determination of Income and Employment Short Answer Type Questions

Question 1. Write the characteristics of traditional theory of income and employment.
Answer:
Followings are the characteristics of theory of income and employment:
1. Automatic balance between demand and supply:
According to J.B. Say, the supply creates its own demand. When goods are produced and supplied, it automatically creates demand for some other goods, the classical economists always believed in automatic full employment through the free play of market mechanism, the forces of demand and supply.

2. Idea of unemployment is baseless:
The classical economist were not scared of the problem of unemployment. There cannot be any involuntary unemployment in classical and neoclassical world. According to them excess production is impossible so there is no question of normal unemployment.

3. Non – Interference society:
According to traditional economists, if there is no interference of the government in the economy of a nation then the situation of unemployment will never rise. If the government interferes in the matters then unemployment will always arise.

4. Supply creates its own demand:
According to classical theory supply, creates its own demand. Supply leads to production, expenditure income and demand. Therefore aggregate supply becomes equal to aggregate demand.

Question 2. Write assumptions of traditional theory or classical theory of income and employment
Answer:
Assumption of Classical theory: Followings are the assumptions of classical theory of economics:

  1. The economy enjoys the state of full employment as the aggregate demand is equal to aggregate supply.
  2. There is no saving in the economy as all that is earned is invested.
  3. There is free competition among the products and factors.
  4. There is always possibility of extension of market.
  5. There is end of interference of government and non – government and no protection is given.
  6. There is no accumulation of wealth.
  7. This theory works only when all the goods produced are sold in market.

Question 3. What is unemployment according to Keynes?
Answer:
According to Keynes, there cannot be an automatic equality between aggregate demand and full employment. He holds the state of full employment rarely exits. It is possible that aggregate demand may full short of aggregate supply and state of full employment is disturbed. According to him there is a state of involuntary unemployment where able persons work at current rates of remuneration face unemployment. Unemployment exits due to lack of effective demand and lack of expenditure on consumption and investment.

Question 4. What are the components of aggregate demand? Explain.
Answer:
Followings are the components of aggregate demand:

1. Household consumption demand:
In this category comes, the goods and services to satisfy their consumption needs. The aggregate consumption expenditure constitutes consumption demand. Household consumption depends on level of income.

2. Investment demand:
This component of aggregate demand comes from the business firms. Investment goods like machines, factory buildings are not demanded by household consumer but by business or firms.

3. Government demand for goods and services:
Like consumers and firms, government may also demand goods and services either for consumption or for investment purposes.

4. Net export demand:
To find out aggregate demand of a country items of net export demand is included in it. For this, import is subtracted from exports.

Question 5. Write short note on:

  • Full employment
  • Under employment.

Or
What do you mean by full employment and under employment?
Answer:
Full employment:
The term “full employment” signifies the situation wherein all the persons willing to work at existing rate of remuneration are getting employment. Full employment never means zero unemployment.

Under employment:
It refers to that situation wherein all the persons are willing to work at existing rate of remuneration do not get employment. It signifies the state where the available resources are not fully utilized the aggregate supply of goods and services.

Question 6. Distinguish between Aggregate Demand and Aggregate Supply.
Answer:
Differences between Aggregate Demand and Aggregate Supply:
Aggregate Demand:

  1. Aggregate demand is refers to the total volume of goods and services demanded in an economy in a year.
  2. It implies the total amount of expenditure incurred by the community on purchase of all goods and services.
  3. Aggregate demand and aggregate expenditure is the same thing.

Aggregate Supply:

  1. Aggregate supply refers to the total supply of goods and services in the economy in a year.
  2. According to classical concept aggregate supply is perfectly in elastic with respect to the price.
  3. According to Keynesian concept the aggregate supply is perfectly elastic with respect to price level.

Question 7. Differentiate between Induced Investment and Autonomous Investment
Answer:
Differences between Induced Investment and Autonomous Investment:
Induced Investment:

  1. Induced investment is that investment which depends on the expected profitability of level of income.
  2. It is income elastic.
  3. This investment is generally made in private sector.
  4. Induced investment curve tends to move upwards indicating increased investment of the increased level of income.

Autonomous Investment:

  1. Autonomous investment is that investment which is not influenced by the expected profitability.
  2. It is not income elastic.
  3. This investment is generally made in public sector.
  4. Autonomous investment curve is a horizontal straight line parallel to X-axis. It indicating that autonomous investment is independent of the level of income.

Question 8. Explain paradox of thrift.
Answer:
Paradox of thrift:
The paradox of thrift, in brief, states that the higher ratio of saving in an economy will create condition that result in a fall in aggregate savings. This can be explained as follows If all the people in the economy start saving more, the aggregate demand for consumption will decrease which will lead to low investment, low production and low income. Consequently the savings will reduce. This is known as paradox of thrift.

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