# NCERT Solutions for Class 12 Macro Economics Chapter 4: Determination of Income and Employment

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The NCERT Solutions for Class 12 Macro Economics cover all the questions pertaining to the subject in a very clear and lucid manner. Apart from being highly accurate, these solutions are also very easy to memorize. These solutions are written as per the latest CBSE syllabus and are helpful in clearing doubts. On this solution page, we have provided you with complete overview of the concepts and methods covered in the Chapter 4 of Macro Economics – Determination of Income and Employment.

## NCERT Solutions for Class 12 Macro Economics Chapter 4

### Determination of Income and Employment Solutions

#### Q1) What is marginal propensity to consume? How is it related to marginal propensity to save?

Answer) Marginal propensity to consume is an essential component of Keynesian macroeconomics theory and is defined as the increase in consumption expenditure due to increased incomes. It is expressed as ∆C/∆Y which shows change in consumption with change in income.

Where ∆C = Change in consumption
∆Y = Change in Income

MPC and MPS (Marginal propensity to save) are related as follows:

MPC + MPS = 1
or MPS = 1- MPC
or MPC = 1- MPS

For example, If a person gets Rs. 1000 extra as bonus, and if he spends around Rs. 700 and saves 300, then his MPC will be 0.7 and MPS will be 300 or (1- 0.7) = 0.3.

#### Q3) What do you understand by ‘parametric shift of a line’? How does a line shift when its (i) slope decreases, and (ii) its intercept increases?

Say the equation of straight line of the form y = mx + c, where m > 0 is called the slope of the straight line (x) and c > 0 is the intercept on the vertical (y) axis. Any increase in x will result in increasing the value of y by a unit of m. Here m and c are known as parameters of the graph and they are responsible for regulating the position of the graph.

The parametric shift refers to the curve changes due to the modification of the value of the entities in the graph. Under these conditions;

• If the slope is reduced, the consumption curve shifts downward.
• As the intercept increases, the consumption curve moves in parallel with the intercept.

#### Q4) What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?

Answer) Effective demand is the demand for product or a service when purchasers become constrained in a market. It also refers to their ability and willingness to purchase goods at different levels. According to the macroeconomic theory by Keynes, effective demand is referred to as the point of equilibrium where aggregate demand equals aggregate supply.

Graphically it can be represented as:

In this graph the x-axis is representing income and the y-axis is representing level of aggregate demand. The two curves AD and AS meet at equilibrium point E. Effective demand is shown by EG. AD represents the output level. Autonomous expenditure multiplier can be derived as follows

Therefore
Y = A + cY
or A = Y – cY
A = Y (1 – c)
Y = A / (1 – c)

Where,
A = Autonomous expenditure
c = MPC or Marginal Propensity to Consume
Y = Level of income
1 / 1-c = autonomous expenditure multiplier

Therefore we can say that autonomous expenditure multiplier is dependent on the MPC and Income level.

#### Q5)

Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4000 crores. State whether the economy is in equilibrium or not (cite reasons).

Consumption expenditure (A)= Rs 50 Crores and MPS = 0.2
We know that,
MPC = 1 − MPS
MPC = 1 – 0.2
= 0.8

Also,
Y = 4000 Crores
We know that AD = A + cY
Putting the values in the given equation we have
AD = 50 + 0.8 × 4000
= 50 + 3200
= Rs 3250 Crores

We can observe that Rs 3250 < Rs 4000
It means that AD < Y

Consequently, since the level of output is not equal to the level of income, the economy is not in equilibrium.

#### Q6) Explain ‘Paradox of Thrift’.

Answer) Paradox of thrift is said to be a situation where people tend to save more money and this form of increased saving leads to reduced consumption and as a result there is a decrease in aggregate consumption. Such a system of savings will lead to decrease in levels of employment and reduce the total savings of the economy and slows down growth of economy. This is one of the central component of Keynesian economics.

That’s it. These were the solutions of NCERT Class 12 Macro Economics Chapter 4 – Determination of Income and Employment. Our team hopes that you have found these solutions helpful for you. If you have any doubt related to this chapter then feel free to comment your doubts below. Our team will try their best to help you with your doubts.