Chapter 2
National income computation
Q1: What is aggregate demand?
Answer: Aggregate demand is the total demand for final goods and services in an economy at a given level of income during a given period.
Q2: Determine the income multiplier if the marginal propensity to save (MPS) is 0.3.
Answer:
Income multiplier (k) = 1 / MPS
= 1 / 0.3
= 3.33
Q3: The ratio of change in consumption to change in income is called…?
Answer: Marginal Propensity to Consume (MPC)
Q4: What is aggregate supply?
Answer: Aggregate supply is the total value of final goods and services that producers are willing and able to supply in an economy during a given period.
Q5: What is involuntary unemployment?
Answer: Involuntary unemployment refers to a situation where people are willing to work at the prevailing wage rate but cannot find jobs.
Q6: What is the significance of the 45° line in the Keynesian income model?
Answer: The 45° line shows all points where aggregate demand equals aggregate supply, indicating equilibrium income levels.
Q7: If the value of MPS is zero, what is the value of MPC?
Answer: MPC = 1
Q8: What is autonomous consumption expenditure?
Answer: It is the consumption expenditure that occurs even when income is zero. It does not depend on income.
Q9: What is excess demand?
Answer: Excess demand occurs when aggregate demand exceeds the level of output at full employment.
Q10: What is investment?
Answer: Investment is the expenditure on capital goods such as machinery, equipment, and buildings used for future production.
Q11: What is marginal propensity to consume (MPC)?
Answer: It is the ratio of change in consumption to the change in income.
MPC = ΔC / ΔY
Q12: What is marginal propensity to save (MPS)?
Answer: It is the ratio of change in savings to the change in income.
MPS = ΔS / ΔY
Q13: What is consumption expenditure?
Answer: It is the total expenditure by households on goods and services for their personal use.
Q14: What is net export?
Answer: Net export is the difference between the value of exports and imports of goods and services.
Net Export = Exports – Imports
Q15: What does ‘expected’ mean in economics?
Answer: It means “planned.”
Q16: What is the consumption function?
Answer: It is the relationship between total consumption and total income in an economy.
Q17: What is average propensity to consume (APC)?
Answer: APC is the ratio of total consumption to total income.
APC = C / Y
Q18: What is average propensity to save (APS)?
Answer: APS is the ratio of total savings to total income.
APS = S / Y
Q19: What is autonomous investment?
Answer: It is the investment that does not change with changes in income. Usually done by the government.
Q20: What is induced investment?
Answer: Investment that changes with changes in income, production, or profit.
Q21: What is voluntary unemployment?
Answer: It refers to people who choose not to work even when jobs are available.
Q22: What is the multiplier?
Answer: It is the ratio of change in income to the change in investment.
k = ΔY / ΔI
Q23: If MPS = 1, what is MPC?
Answer: MPC = 0
Q24: If MPC = 0.25, what is the value of the multiplier?
Answer:
k = 1 / (1 – MPC) = 1 / (1 – 0.25) = 1 / 0.75 = 1.33
Q25: What is Say’s Law of Markets?
Answer: “Supply creates its own demand.”
Q26: What is unplanned inventory accumulation?
Answer: When actual supply exceeds planned demand, leading to unsold goods.
Q27: What is a saving function?
Answer: It is the relationship between income and savings. Represented as: S = f(Y)
Q28: What is the relationship between MPC and MPS?
Answer:
MPC + MPS = 1
Q29: Why is MPC never greater than 1?
Answer: Because a part of the income is saved, MPC must be ≤ 1.
Q30: What is marginal efficiency of investment (MEI)?
Answer: MEI is the expected rate of return from an additional unit of investment.
Q31: What is effective demand?
Answer: When aggregate demand equals aggregate supply, resulting in equilibrium income and employment.
Q32: What is the maximum value of the multiplier?
Answer: Infinity, when MPS = 0 and MPC = 1.
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