Income Determination Test

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Income Determination Test - 18

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Weekly Quiz Competition

Question 1
1 / -0

If income changes from 3000 to 4500 and saving changes from 600 to 900, then calculate APS?

A
0.20

B
0.33

C
0.13

D
0.25

Solution

APS $$= \dfrac{Savings}{Income}$$

We can calculate APS for both time period.

In the first time period, S = 600 and Y = 3000.
APS = $$\dfrac{600}{3000} = $$ $$0.2$$

In the second time period, S = 900 and Y = 4500.
APS = $$\dfrac{900}{4500} =$$ $$0.2$$
Question 2
1 / -0

If consumption in period 1 is 650 and income is 700 and the same for period 2 stands at 700 and 800 respectively, find MPC.

A
0.3

B
0.4

C
0.5

D
0.6

Solution

MPC = $$\dfrac{\text{Change in C}}{\text{Change in Y}}$$
where, C = consumption,
and Y = Income

$$MPC =$$ $$\dfrac{700-650}{800-700} =$$ $$\dfrac{50}{100}$$ $$= 0.5$$

$$MPC = 0.50$$
Question 3
1 / -0

In an economy, the population spends Rs 150 crore on absolute necessities needed to sustain themselves. The current income is Rs 450 crore and MPC is 0.6. What is the level of saving?

A
Rs 30 crore

B
Rs 270 crore

C
Rs 420 crore

D
Rs 180 crore

Solution

The Keynesian saving function is given as: S = -a +(1- b) Y
where, S= Savings,
a = autonomous consumption and
b = marginal propensity to consume (MPC)
S = -150 + (1- 0.6) x 450 = 30.
Saving = Rs. 30 crore.
Question 4
1 / -0

If income changes from 1000 to 1500 and saving changes from 200 to 250, then calculate APS .

A
0.2

B
0.16

C
0.2 for the time period 1 and 0.16 for the time period 2

D
0.16 for the time period 1 and 0.2 for the time period 2

Solution

APS $$= \dfrac{Savings}{Income}$$

We can calculate APS for both time period.

In the first time period, S = 200 and Y = 1000.
APS = $$\dfrac{200}{1000} = $$ $$0.2$$

In the second time period, S = 250 and Y = 1500.
APS = $$\dfrac{250}{1500} =$$ $$0.16$$
Question 5
1 / -0

If income changes from 1000 to 1500 and saving changes from 200 to 250, then calculate MPS.

A
0.1

B
0.5

C
0.6

D
0.4

Solution

MPS $$=\dfrac{\text{Change in savings}} {\text{Change in Income}}$$

MPS $$=\dfrac{250-200}{1500-1000}$$ $$=\dfrac {50}{500}=$$ $$0.1$$
Question 6
1 / -0

Which of the following factors don't affect the propensity to consume in an economy?

A
Rate of interest

B
Wealth

C
Taxes

D
Consumer credit

Solution

The factors that influence consumption and savings behaviour in the economy are as follows:

Rate of interest: Commercial bank offer a certain rate of interest on the deposits held by public and charges rate of interest on the loans given to public. When people do not want to purchase goods and services, they keep their money in the bank to earn the rate of interest. But when they want to buy goods and services, they withdraw money from the bank and lose interest in the process. In this way, the rate of interest plays an important role in influencing a persons decision to consume.

Wealth: Propensity to consume is influenced by a persons holding of wealth. People who have wealth in the form of gold, jewellery, ownership of land and building, shares and bonds etc enjoy a higher level of income generated from the wealth. Accordingly, their consumption level will be higher.

Consumer credit: Availability of consumer credit influences consumption behaviour to a large extent in the economy. There are many durable goods which consumers want to buy. But due to lack of credit facility, they are not able to buy them as they are costly items.
Question 7
1 / -0

If consumption in period 1 is 200 and income is 600 and the same for period 2 stands at 300 and 750 respectively, find MPC.

A
0.33

B
0.44

C
0.55

D
0.66

Solution

MPC = $$\dfrac{\text{Change in C}}{\text{Change in Y}}$$
where, C = consumption,
and Y = Income

$$MPC =$$ $$\dfrac{300-200}{750-600} =$$ $$\dfrac{100}{150}$$ $$= 0.66$$

$$MPC = 0.66$$
Question 8
1 / -0

If MPC = 0.8 and fixed consumption is 200, write the saving equation.

A
S = -200 - 0.8Y

B
S = -200 + 0.2Y

C
S = 200 + 0.8 Y

D
S = -200 + 0.8 Y

Solution

The Keynesian saving function is given as: S = -a +(1- b) Y
where, S= Savings,
Y = Income
a = autonomous consumption and
b = marginal propensity to consume
S = -200 + (1- 0.8) x Y
S = -200+0.2Y
Question 9
1 / -0

According to ______________________, equilibrium level of income and output in the economy is the one where the desired aggregate demand for goods and services is equal to aggregate supply.

A
aggregate demand-aggregate supply approach

B
saving-investment approach

C
income-output approach

D
none of the above

Solution

According to aggregate demand-aggregate supply approach, the equilibrium is reached only when aggregate demand (AD)is equals to aggregate supply (AS) because at this level there is no tendency for income and output to change.
In the diagram the equilibrium is at K where AD intersects 45 line. At this point, AD = AS.
When AD is more than AS (say, at point R), then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output More output means more income. Rise in output means rise in AS and rise in income means rise in AD. Both continue to rise till they reach K, where AD = AS.
When AD is less than AS (say, at point S), then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till AD becomes equal to AS.
So, equilibrium takes place only at point K, when AD = AS
Question 10
1 / -0

If MPC = 0.3 and fixed consumption is 900, write the consumption equation.

A
C = 900 = 0.3 Y

B

S = 900 + 0.3 Y

C
C = -900 + 0.6 Y

D
S = 900 - 0.6 Y

Solution

The Keynesian consumption function is given as: C = a + b Y
where, C= Consumption,
Y = Income
a = autonomous consumption and
b = marginal propensity to consume
C = 900 + 0.3 Y

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Income Determination Test - 18

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Income Determination Test - 18

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Question 1

0.20

0.33

0.13

0.25

Solution

Question 2

0.3

0.4

0.5

0.6

Solution

Question 3

Rs 30 crore

Rs 270 crore

Rs 420 crore

Rs 180 crore

Solution

Question 4

0.2

0.16

0.2 for the time period 1 and 0.16 for the time period 2

0.16 for the time period 1 and 0.2 for the time period 2

Solution

Question 5

0.1

0.5

0.6

0.4

Solution

Question 6

Rate of interest

Wealth

Taxes

Consumer credit

Solution

Question 7

0.33

0.44

0.55

0.66

Solution

Question 8

S = -200 - 0.8Y

S = -200 + 0.2Y

S = 200 + 0.8 Y

S = -200 + 0.8 Y

Solution

Question 9

aggregate demand-aggregate supply approach

saving-investment approach

income-output approach

none of the above

Solution

Question 10

C = 900 = 0.3 Y

S = 900 + 0.3 Y

C = -900 + 0.6 Y

S = 900 - 0.6 Y

Solution

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