Short run Equilibrium Output

1 Mark Questions

1. Give the meaning of ex-ante savings. (Delhi 2010)

Ans. The planned or desired savings during an accounting year is termed as ex-ante saving. These are desired savings by the people for one year.

1. What is ex-ante Aggregate Demand? (All India 2010)

Ans. The planned expenditure on the purchase of goods and services in an economy during a period of one year, is termed as ex-ante Aggregate Demand.

1. When will there be equilibrium level of National Income? (All India 2010)

Ans. When Aggregate Demand is equal to Aggregate Supply (AD = AS) in an economy at full employment level, then it is termed as the equilibrium level of National Income.

1. What can be the minimum value of investment multiplier? (Delhi 2009) Ans. The minimum value of investment multiplier is 1.
2. If the investment multiplier is 1, what will be the value of Marginal Propensity to Consume? (Delhi 2009)

Ans. If the investment multiplier is 1, the value of Marginal Propensity to Consume is 0. Multiplier (K) = 1/1-MPC

<math>1=1/1-MPC</math>

1. MPC =1

<math>1 - 1 = MPC = 0</math>

3 Marks Questions

1. Explain the meaning of investment multiplier. What can be its minimum and maximum value? (Compartment 2014)

Ans. Investment multiplier is the ratio between change in income and the corresponding change in investment. It represents the responsiveness of income to change in investment. It is denoted by K. Symbolically,

Investment Multiplier (K) = <math display="block">\frac{\text{Change in Income } \Delta Y}{\text{Change in Investment } \Delta I}</math>

MPC is Marginal Propensity to

Consume.

The value of Multiplier depends on the value of MPC.

Since, <math>0 < MPC < 1</math>, therefore, if <math>MPC = 0</math>, then <math>K = 1</math>, and if MPC = 1 "<math>K = \infty</math>.

1. Explain the relationship between investment multiplier and Marginal Propensity to Consume. (Delhi 2011)

Ans. There is direct or positive relationship between MPC and multiplier. Higher the MPC, higher will be the value of multiplier and vice-versa Multiplier (K) = 1/1-MPC e.g. If MPC =0.5, then K will be, <math>K = 1/1-0.5=2</math> When MPC increase to 0.75, then K will be

<math>K=1/1-0.75=1/0.25=4</math>

8.As a result of increase in investment by Rs. 60 crore, National Income rises to Rs. 240 crore. Calculate Marginal Propensity to Consume. (All India 2011) Ans. Here, <math>\Delta I = 360</math> crore, <math>\Delta Y = 3240</math> crore

Hence, Multiplier ( K) = <math>\frac{\Delta Y}{\Delta I} = \frac{240}{60} = 4</math> Now, <math display="block">K = \frac{1}{1 - MPC}</math> or <math display="block">4 = \frac{1}{1 - MPC}</math> or <math>4 - 4 MPC = 1</math> or <math>4 MPC = 4 - 1</math> or · <math>MPC = \frac{3}{4}</math>

<math>MPC = 0.75</math>

1. In an economy, investment is increased by Rs. 2000 crore. Calculate the

change in total income, if Marginal Propensity to save is 0.25.

Ans. Here, ∆1 = ₹ 2000 crore, MPS = 0.25

Now,

Multiplier (K) = <math>\frac{1}{MPS} = \frac{1}{0.25} = 4</math>

Again, we know that

<math>K = \frac{\Delta Y}{\Delta I}</math>

<math>4 = \frac{\Delta Y}{}</math>

2000 or <math>\Delta Y = 2000 \times 4</math> or Change in total income (∆ Y) = ₹ 8000 crore