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Income and Employment Test - 6
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Income and Employment Test - 6

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  • Question 1/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): Aggregate Demand is expressed in terms of total expenditure made in the economy.

    Reason (R): Aggregate Demand constitutes of Consumption Expenditure, Investment Expenditure, Government Expenditure and Net Exports.

    Solutions

    Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year.

  • Question 2/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): Private Consumption Expenditure is determined by the level of personal disposable income of the economy.

    Reason (R): The total demand for all goods or services by the household in an economy during an accounting year, is termed as Private Consumption Expenditure.

    Solutions

    Private consumption expenditure measures consumer spending on goods and services.

  • Question 3/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): Full employment is the situation where all those workers who are able to work and willing to work get employment at the prevailing wage rate.

    Reason (R): The situation of full employment is achieved only when the economy is in equilibrium.

    Solutions

    Full employment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply at full employment level.

  • Question 4/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): If AD>AS, the firm will employ more factors of production.

    Reason (R): When AD is more, in order to get back to the equilibrium level the economy bringing AD equal to AS.

    Solutions

    In response to the increase in the price level, producers create more goods and services. This continues until the amount of aggregate production equals the amount of aggregate demand. As prices fall, the amount of aggregate demand increases and the economy returns to equilibrium.

  • Question 5/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): There is an inverse relationship between the value of marginal propensity to save and investment multiplier.

    Reason (R): Saving is a leakage in the circular flow of income. Greater the saving, greater the leakage and lower the value of investment multiplier.

    Solutions

    Higher the MPS, lower the multiplier and lower the MPS, higher the multiplier, as K=1/MPS.

  • Question 6/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): The minimum value of investment multiplier is equal to one.

    Reason (R): The minimum value of investment multiplier is 1, when MPC is 0 and MPC can never be negative.

    Solutions

    K = 1/1 – MPC

    = 1/1 – 0 = 1

  • Question 7/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): Aggregate demand refers to planned purchase of goods and services during a year.

    Reason (R): AD is the sum total of expenditure that the people plan or desire to incur on the purchase of goods and services produced in an economy during an accounting year.

    Solutions

    Aggregate expenditure is the current value of all the finished goods and services in the economy. The equation for aggregate expenditure is: AE = C + I + G + NX . The aggregate expenditure equals the sum of the household consumption (C), investments (I), government spending (G), and net exports (NX).

  • Question 8/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): When income is zero, consumption is also zero.

    Reason (R): There is always some minimum level of consumption in the economy even when income is zero.

    Solutions

    When income is zero, consumption is not zero as there is always some minimum level of consumption in the economy.

  • Question 9/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): If S>I, then equilibrium income will have a tendency to reduce.

    Reason (R): As according to Keynes, the income employment equilibrium is determined at the point where investments and savings are equal.

    Solutions

    In the Keynesian analysis, the equilibrium level of employment and income is determined at the point of equality between saving and investment. Saving is a function of income, i.e. S = f (Y). It is defined as the excess of income over consumption, S=Y-C and income is equal to consumption plus investment.

  • Question 10/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): AS increases proportionate to the increase in AD so long as there is excess capacity in the economy.

    Reason (R): Excess capacity arises because of excess supply.

    Solutions

    Excess capacity arises because of deficiency of demand.

  • Question 11/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): Saving and investment are always equal.

    Reason (R): Planned S and Planned I are equal only at equilibrium level.

    Solutions

    Saving (S) and Investment (I) can be realized (ex-post) and planned (ex-ante). Planned S and Planned I are equal only at equilibrium level. Realized S and realized I are always equal.

  • Question 12/12
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    Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

    Assertion (A): The maximum value of investment multiplier is equal to infinity.

    Reason (R): The maximum value of investment multiplier is ∞, when MPC is 1, i.e., whole additional income is converted into additional consumption.

    Solutions

    K = 1/1 – MPC

    = 1/1 – 1

    = 1/0 = ∞

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