Income Determination Test

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Income Determination Test - 19

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Weekly Quiz Competition

Question 1
1 / -0

The two approaches to determination of the equilibrium level of income are:

A
Aggregate demand-Aggregate supply approach

B
Saving-Investment approach

C
Demand-Supply approach

D
Both A & B

Solution

Two approaches are:
1) Aggregate demand-Aggregate supply approach-
An economy is in equilibrium when aggregate demand for goods and services is equal to aggregate supply during a period of time.
So, equilibrium is achieved when:
AD = AS … (1)
We know, AD is the sum total of Consumption (C) and Investment (I):
AD = C + I … (2)
Also, AS is the sum total of consumption (C) and saving (S):
AS = C + S … (3)
Substituting (2) and (3) in (1), we get:
C + S = C + I.....(4)
2)Saving-Investment approach
According to this approach, the equilibrium level of income is determined at a level, when planned saving (S) is equal to planned investment (I).
from equation( 4)
S = I
Question 2
1 / -0

_____________________ is defined as the multiple amount by which income increases as a result of increase in investment expenditure.

A
Investment multiplier

B
Expenditure multiplier

C
Income multiplier

D
None of the above

Solution

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.
Question 3
1 / -0

If MPC = 0.8 and fixed consumption is 600, write the consumption equation.

A
C = 600 + 0.8Y

B
C = 600 - 0.8Y

C
C = 600 + 0.2Y

D
C = 0.2 Y - 600

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
So C = 600 + 0.8 Y
Question 4
1 / -0

According to ________________ equilibrium level of income is determined at the level where planned investment equals planned saving.

A
aggregate demand-aggregate supply approaach

B
saving-investment approach

C
demand-supply approach

D
price-demand approach

Solution

According to this approach of equilibrium, the equilibrium is reached only when Investment(I) is equals to Savings(S) because at this level there is no tendency for income and output to change.
In the diagram the equilibrium is at E1 where savings intersects investment curve At this point, I=S.
When S is more than I , 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 I and rise in income means rise in S. Both continue to rise till they reach E1, S=I.
When S is less than I, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the output till S becomes equal to I.
So, equilibrium takes place only at point E1, when S=I.
Question 5
1 / -0

The multiplier can be expressed algebraically as _________________.

A
$$K = \dfrac{\Delta{I}}{\Delta{Y}}$$

B
$$K = \dfrac{\Delta{AE}}{\Delta{AD}}$$

C
$$K = \dfrac{\Delta{Y}}{\Delta{I}}$$

D
$$K = \dfrac{\Delta{Y}}{\Delta{AD}}$$

Solution

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'. Algebraically,
k = ΔY/ ΔI where Y is the income and I is the investment expenditure in the economy.
Question 6
1 / -0

If MPC = 0.7 and fixed consumption is 700, write the saving equation.

A
S = 700 - 0.7Y

B
S = 0.7 Y + 700

C
S = -700 + 0.3Y

D
S = 700 - 0.3Y

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 = -700 + (1- 0.7) x Y
S = -700 + 0.3 Y
Question 7
1 / -0

Aggregate supply function is a ___________ curve.

A
upward sloping

B
horizontal curve, followed by a upward sloping

C
downward sloping

D
upward sloping curve at first, followed by a vertical

Solution

Aggregate supply refers to the desired level of output in the economy during an accounting year. It is through this output only that the producer sector generates income. Aggregate supply function is a upward sloping curve which denotes the direct relation between the level of output produced in the economy and income generates. The curve become vertical after full employment level of output indicating the maximum amount of output which can be produced in the economy generating the respective national income.
Question 8
1 / -0

_____________ refers to what the households and firms are expected to spend on the purchase of different goods and services in the economy.

A
Aggregate supply price

B
Aggregate demand price

C
Aggregate expenditure

D
None of the above

Solution

Aggregate demand price refers to the the maximum value of money which the households and firms expect to spend on the purchase of different goods and services for consumption and production purpose respectively in the economy.
Question 9
1 / -0

The aggregate demand curve intercepts on the _________.

A
Y-axis

B
X-axis

C
point of origin

D
none of the above

Solution

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

Aggregate demand= C+I+G+ (X-M) where

C= Consumption expenditure

I= Investment expenditure

G= Government expenditure

(X-M)= Net export
Aggregate demand curve is upward sloping showing a positive relation between level of income and overall expenditure in the economy. The curve intercepts on Y-axis because even at zero level of income, there is some consumption which is required for the very existence of life.
Question 10
1 / -0

_______________ is the minimum amount of money, which all the entrepreneurs in the economy must receive from the sale of output produced by them, at any given level of employment.

A
Aggregate supply price

B
Aggregate profit

C
Aggregate demand price

D
Aggregate income

Solution

Aggregate supply price refers to the minimum value of money which all the entrepreneurs in the economy must expect from the sale of output produced by them using the factors of production, at any given level of employment. This is the rate of return from the business according to which the firms make their long term and short term plans.

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Re-Attempt Weekly Quiz Competition

Income Determination Test - 19

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Income Determination Test - 19

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SHARING IS CARING

Question 1

Aggregate demand-Aggregate supply approach

Saving-Investment approach

Demand-Supply approach

Both A & B

Solution

Question 2

Investment multiplier

Expenditure multiplier

Income multiplier

None of the above

Solution

Question 3

C = 600 + 0.8Y

C = 600 - 0.8Y

C = 600 + 0.2Y

C = 0.2 Y - 600

Solution

Question 4

aggregate demand-aggregate supply approaach

saving-investment approach

demand-supply approach

price-demand approach

Solution

Question 5

$$K = \dfrac{\Delta{I}}{\Delta{Y}}$$

$$K = \dfrac{\Delta{AE}}{\Delta{AD}}$$

$$K = \dfrac{\Delta{Y}}{\Delta{I}}$$

$$K = \dfrac{\Delta{Y}}{\Delta{AD}}$$

Solution

Question 6

S = 700 - 0.7Y

S = 0.7 Y + 700

S = -700 + 0.3Y

S = 700 - 0.3Y

Solution

Question 7

upward sloping

horizontal curve, followed by a upward sloping

downward sloping

upward sloping curve at first, followed by a vertical

Solution

Question 8

Aggregate supply price

Aggregate demand price

Aggregate expenditure

None of the above

Solution

Question 9

Y-axis

X-axis

point of origin

none of the above

Solution

Question 10

Aggregate supply price

Aggregate profit

Aggregate demand price

Aggregate income

Solution

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