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Income and Employment Test - 7

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Income and Employment Test - 7
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  • Question 1
    1 / -0.25

    Read the following report and answer the questions that follow:

    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. In order to control the situation, the government has announced various stimulus packages to revive the economy and providing employment through road and railway building projects. Still the desired savings or ex-ante savings that is required for the functioning of the economy has reduced. It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the aggregate demand in the economy.

    Due to the Covid-19 situation what has happened:

    Solution

    Due to the Covid-19 situation, people used their savings for consumption. Thus, there has been a fall in the savings of the people.

  • Question 2
    1 / -0.25

    Read the following report and answer the questions that follow:

    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. In order to control the situation, the government has announced various stimulus packages to revive the economy and providing employment through road and railway building projects. Still the desired savings or ex-ante savings that is required for the functioning of the economy has reduced. It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the aggregate demand in the economy.

    The fall in the savings is due to:

    Solution

    Due to the Covid-19 situation, income of the people has decreased. Thus, people used their savings for their consumption.

  • Question 3
    1 / -0.25

    Read the following report and answer the questions that follow:

    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. In order to control the situation, the government has announced various stimulus packages to revive the economy and providing employment through road and railway building projects. Still the desired savings or ex-ante savings that is required for the functioning of the economy has reduced. It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the aggregate demand in the economy.

    Which options did the government use to increase the savings and consumption in the economy:

    (1) Giving stimulus packages

    (2) Reducing investment in infrastructure

    (3) Open Market Operations

    (4) Providing employment

    Choose the correct option:

    Solution

    Government has announced various stimulus packages to revive the economy and to invest in infrastructure such as building roads and railways to provide employment.

  • Question 4
    1 / -0.25

    Read the following report and answer the questions that follow:

    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. In order to control the situation, the government has announced various stimulus packages to revive the economy and providing employment through road and railway building projects. Still the desired savings or ex-ante savings that is required for the functioning of the economy has reduced. It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the aggregate demand in the economy.

    It is seen that the private consumption expenditure, private investment expenditure and ex-ante savings has reduced the ________________ in the economy.

    Solution

    Aggregate demand represents the total demand for goods and services at any given price level in a given period. Aggregate demand consists of all consumer goods, capital goods (factories and equipment), exports, imports, and government spending programs.

  • Question 5
    1 / -0.25

    Read the report given below and answer the questions that follow:

    In an economy the 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 Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing 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. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.

    Aggregate Demand is not determined by which of the following:

    Solution

    AD=C+I+G+X-M

    Where,

    C=Household Consumption Expenditure

    I=Private Investment Expenditure

    G=Government Expenditure

    X-M=Net Exports

  • Question 6
    1 / -0.25

    Read the report given below and answer the questions that follow:

    In an economy the 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 Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing 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. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.

    Savings and Investment affect the ________.

    Solution

    • In the long term, an increase in investment should also increase productive capacity and increase aggregate supply. Therefore, investment can enable a more sustainable increase in AD. The increase in capacity enables a sustained rise in AD without causing inflation.

    • As household wealth increases, aggregate demand usually increases as well. Conversely, a decline in wealth usually leads to lower aggregate demand. Increases in personal savings will also lead to less demand for goods, which tends to occur during recessions.

  • Question 7
    1 / -0.25

    Read the report given below and answer the questions that follow:

    In an economy the 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 Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing 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. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.

    Investment Multiplier is the ratio of change in ___________ and _____________.

    Solution

    The term investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy.

  • Question 8
    1 / -0.25

    Read the report given below and answer the questions that follow:

    In an economy the 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 Multiplier, that is investment multiplier, which is influenced by the ratio of total consumption and total income, regulates the flow of money in the economy influencing 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. When savings is less than the investments the aggregate demand is more than the aggregate supply, and vice versa.

    What happens when the Investment is lesser than Savings?

    Solution

    When the investment is less than savings, the expenditure in the economy is less than what producers had expected, resulting in undesired building-up of unsold stock. Consequently, AD falls short of AS.

  • Question 9
    1 / -0.25

    Read the report given below and answer the questions that follow:

    When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex-ante consumption, ex-ante investment, government spending, etc. The rate of increase in ex-ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

    The equilibrium level is when,

    Solution

    The equilibrium is when AD=AS.

    So that, all the producers wish to produce during the year is exactly equal to what the buyers wish to spend on the purchase of goods and services during the year.

  • Question 10
    1 / -0.25

    Read the report given below and answer the questions that follow:

    When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex-ante consumption, ex-ante investment, government spending, etc. The rate of increase in ex-ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

    The rate of increase in __________________ due to a unit increment in income is called marginal propensity to consume.

    Solution

    MPC is the ratio between change in consumption and change in income.

  • Question 11
    1 / -0.25

    Read the report given below and answer the questions that follow:

    When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex-ante consumption, ex-ante investment, government spending, etc. The rate of increase in ex-ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

    At the price level mentioned in the case, Aggregate Supply is ____________.

    Solution

    In Keynesian approach, aggregate supply is perfectly elastic with respect to price level till full employment level of output. It means firms are willing to produce any amount of output at the prevailing price level till full employment level of output is reached.

  • Question 12
    1 / -0.25

    Read the report given below and answer the questions that follow:

    When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex-ante consumption, ex-ante investment, government spending, etc. The rate of increase in ex-ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

    What is the circumstance when aggregate output is determined solely by the level of aggregate demand called?

    Solution

    Under such circumstances, equilibrium output will be solely determined by the aggregate amount of demand at this price in the economy. We call it effective demand principle .

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