GNG 2.

0 By RAJAT ARORA SIR

Ch- 7
Aggregate Demand and Related Concepts

DAY -14 GNG 2.O By Rajat Arora Sir

Q 1. When C= 70+ 0.5Y, then consumption curve starts from:

a) X-axis
b) Y-axis
c) Origin
d) None of this
Q 2. If the value of APS is 0.2 and National Income is Rs. 4,000 crore, then consumption will
be_____
a) Rs. 4,000 crore
b) Rs. 3,200 crore
c) Rs. 3,800 crore
d) Rs. 2,600 crore
Q 3. The value of _____ can never be negative, while _______ can have a value equal to one.
a) APS, APC
b) MPS, APS
c) APC, APS
d) MPS, APC
Q 4. The value of _______ can be greater than one.
a) Marginal Propensity to Consume
b) Average Propensity to Consume
c) Marginal Propensity to Save
d) Average Propensity to Save
Q 5. AD curve is a:
a) Horizontal straight line parallel to X- axis
b) Positively sloped curve
c) Negatively sloped curve
d) Vertical straight line parallel to the Y-axis
Q 6. Which of the following expression is correct?
a) APC = Consumption/ National Income
b) APC = Change in Consumption/ Change in National Income
c) APC = APS – 1
d) APC = National Income/ Consumption

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Q 7. Suppose in a hypothetical economy, the income rises from Rs. 5,000 crores to Rs. 6,000
crores. As a result, the consumption expenditure rises from Rs. 4,000 crores to Rs. 4,600
crores. Marginal propensity to consume in such a case would be_______.
a) 0.8
b) 0.4
c) 0.2
d) 0.6

GNG 2.0 By RAJAT ARORA SIR

Q 8. If increase in national income is equal to increase in consumption, identify the value of
Marginal propensity to Save:
a) Equal to unity
b) Greater than one
c) Less than one
d) Equal to Zero
Q 9. What is ex-ante consumption? Distinguish between autonomous consumption and
induced Consumption.
Q 10. Justify the following statement with valid argument: ‘At higher levels of income,
people generally have lower Marginal propensity to Consume (MPC).
Q 11. Complete the following table:

Income Consumption MPS APC

0 15 - -
50 50 - -
100 85 - -
150 120 - -

Q 12. Complete the following table:

Income Consumption MPS APS

0 80
100 140 0.4 -
200 - - 0
- 240 - 0.20
- 260 0.8 0.35

Q 13. The consumption function of an economy is: C= 40+ 0.8Y (amount in Rs. Crores).
Determine that level of income where average propensity to consume will be one.
Q 14. The consumption function of an economy is given as: C = 60+ 0.6Y. For the given
consumption function, calculate the break- even level of income.

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Q 15. Given that national income is Rs. 80 crore and consumption expenditure Rs. 64 crore,
find out average propensity to save. When income rises to Rs. 100 crore and consumption
expenditure to Rs. 78 crore, what will be the average propensity to consume and the
marginal propensity to consume?
Q 16. What is meant by Aggregate Demand? State its components.

Q 17. What is the relationship between APC and APS?

Q 18. Differentiate between induced investment and autonomous investment?

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Answer Key
Ans 1. b) Y-axis
Ans 2. b) Rs. 3,200 crore
Ans 3. d) MPS, APC
Ans 4. b) Average Propensity to Consume
Ans 5. b) Positively sloped curve
Ans 6. a) APC = Consumption/ National Income
Ans 7. d) 0.6
Ans 8. d) Equal to Zero
Ans 9. Ex-ante consumption refers to the consumption expenditure planned to be incurred
during a period. Autonomous Consumption refers to the consumption expenditure which
does not depend upon the level of income, i.e. the consumption at zero level of income.
Whereas, Induced Consumption expenditure is directly determined by the level of income.
Ans 10. At a lower level of income, a consumer spends a larger proportion of his/her income
on consumption expenditure (basic survival requirements). As the income increases, owing
to the psychological behavior of a consumer (rational), he/ she tends to save more.
Hence, At higher levels of income, people generally have lower Marginal propensity to
Consume (MPC).
Ans 11. MPS- 0.30; 0.30; 0.30; APC- 1.00, 0.85, 0.80
Ans 12.

Income Consumption MPS APS

0 80
100 140 0.4 0.4
200 200 0.4 0
300 240 0.6 0.20
400 260 0.8 0.35

Ans 13. Rs. 200 crores

Ans 14. Break – even level of income = 150
Ans 15. Average propensity to Save= Saving/ Income = 80- 64/80 = 16/80 = 0.20
When income rises to Rs. 100 crore and consumption expenditure to Rs. 78 crore
Average Propensity to consume = Consumption/ Income = 78/100 = 0.78
Marginal Propensity to consume= Change in Consumption/ Change in Income = 14/20 = 0.70

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Ans 16. Aggregate Demand:
• Aggregate demand refers to the total value of final goods and services which all the
sectors of an economy are planning to buy at a given level of income during a
period of one accounting year.
• Alternately, AD is the aggregate expenditure that different sectors of the economy
are willing to incur during a given period of time.
• It means AD and Aggregate Expenditure mean the same.
• AD is the Total expenditure that all households, firms, governments and the rest of
the world are planning to incur during a given period of time.
• AD is a flow concept as it is generally measured for the period of an accounting
year.

The various components of aggregate demand are:

1) Private (Household) Consumption Expenditure (C):
• It refers to the total expenditure incurred by households on the purchase of
goods and services during an accounting year.
• Consumption expenditure is directly influenced by the level of disposable
income i.e. higher the disposable income more is the consumption
expenditure and vice-versa.
• The consumption expenditure we are discussing is ex-ante, i.e. planned
consumption expenditure.
Disposable income – It refers to the income from all sources, which is available to
households for spending on consumption and saving.
2) Investment Expenditure (I):
• It refers to the total expenditure incurred by all private firms on capital goods.
• It includes an addition to the stock of physical capital assets such as
machinery, building, etc. and changes in inventory.
• It is assumed that "investment expenditure" is autonomous i.e. investments
are not influenced by the level of income.
3) Government Expenditure (G):
• It refers to the total expenditure incurred by the government on consumer
goods and capital goods to satisfy the common needs of the economy.
• It includes:
a) Consumption expenditure: It is incurred to meet public needs like law and
order, education, health, etc.
b) Investment expenditure: It involves the construction of highways, roads,
power plants, etc.
4) Net Exports (X – M):
• The difference between exports and imports is termed as net exports.
• Exports indicate demand for goods produced within the domestic territory of a
country by the rest of the world.
• Imports refer to the demands of the residents of a country for the goods that
have been produced abroad.

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Components or Determinants or
Constituents of AD

Private Consumption Investment Government Net Exports

Expenditure Expenditure Expenditure (Exports – Imports)
(C) (I) (G) (X - M)

AD = C + I + G + (X – M)

Ans 17. The relationship between APC and APS is:

• The sum of APC and APS is equal to one.
• APC + APS = 1, because Income is either used for consumption or for saving.
We know: Y = C + S
Dividing both sides by Y, we get
𝑌 𝐶 𝑆
= +
𝑌 𝑌 𝑌
1 = APC + APS
Ans 18. The differences between induced investment and autonomous investment are:

Basis Induced investment Autonomous investment

Meaning It refers to the investment which It refers to the investment which is
depends on profit expectations not affected by changes in the
and is directly influenced by level of income and is not
income level. influenced solely by a profit
motive.
Income It is income elastic, i.e. increase in It is unaffected by changes in
elasticity income level raises its level. income level.
Motive It is driven by a profit motive, i.e. It is done for social welfare and
it depends on profit expectations. not for profit.
Sector It is generally done by the private It is generally done by the
sector. government sector.

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Investment Its curve slopes upwards as it is Its curve is parallel to the X-axis as
curve income elastic. it is income inelastic.
Y Induced Y Autonomous
Investment Curve I Investment Curve

Investment (in ₹)
M1

Investment (in ₹)
M I I
I
X X
O Y Y1 O Y Y1
Income (in ₹) Income (in ₹)

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GNG 2.0 Rajat Arora Sir

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