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Class 12-science NCERT Solutions Economics Chapter 4 - Income Determination

Income Determination Exercise 65

Solution 1

Marginal propensity to consume is the ratio of the change in consumption expenditure to the change in income level. It shows the changes in consumption expenditure resulting from changes in the level of income.


MPC = Marginal propensity to consume

C = Change in consumption expenditure

Y = Change in income level


Consumption expenditure always tends to change due to changes in income. The marginal propensity to consume indicates the proportionate change in consumption with respect to changes in income level.

Relationship between marginal propensity to consume and marginal propensity to save

Marginal propensity to save is the ratio of the change in savings to the change in disposable income.


MPS = Marginal propensity to save

S = Change in savings

Y = Change in income level

Individuals spend their disposable income on either consumption or savings. The following identities explain the relationship between MPC and MPS.

MPC + MPS = 1

MPS = 1 - MPC

MPC = 1 - MPS

The above identities indicate that the income is spent on consumption and saving. 

Solution 2

Differences between ex ante investment and ex post investment.

Ex ante investment

Ex post investment

Planned and anticipated investment

Real level of investment made by a firm during a particular period of time

Basically a projected investment

Factual investment which indicates investment spending by a firm during a particular period of time

Anticipation or expectation is the main base

Actual requirement in the present is the main base


Solution 3

Parametric shift of a line indicates that the shift is caused by changes in the value of parameters.

(i) Slope decreases

Decrease in the slope causes downward rotation around the vertical intercepts in the straight line.

(ii) Intercept increases

Increase in the slope causes parallel upward rotation around the vertical intercepts in a straight line.

Parametric shift of a line is dependent on the slope and intercepts. Changes in the slope and intercept lead to a change in the parametric shift of a line. 

Solution 4

Effective demand: A situation in which the output equilibrium is determined only by an aggregate demand is called an effective demand. Here, aggregate supply is assumed to be infinitely elastic and it changes according to changes in the aggregate demand.

Determination of autonomous expenditure multiplier when the price of final goods and the rate of interest are given.


Level of income and marginal propensity to consume determine the autonomous expenditure multiplier. 

Solution 5

As given,

Consumption expenditure (A) is Rs 50 crores

Marginal propensity to save is 0.2

Level of income (Y) is 4000 crores

The economy will be in equilibrium when the aggregate demand is equal to the level of income.


So, MPC=0.8

Putting these values to calculate the aggregate demand,


Here, the level of income is greater than the aggregate demand. This indicates that the economy is not in equilibrium. 

Solution 6

Paradox of Thrift is a situation in which people's propensity to save is more than the propensity to consume. People tend to save more money when there is a possibility of recessionary situation in the economy.

An increase in savings causes a reduction in consumption. Reduction in consumption expenditure leads to a decline in the aggregate demand. Decline in the aggregate demand eventually causes a decrease in the overall savings of an economy.

The concept of Paradox of Thrift was introduced by Keynes wherein he advised not to save more at the individual level in the economy.

According to Keynes, an increase in savings at the individual level will gradually reduce the aggregate demand of an economy, and finally, it will take the economy towards a recessionary situation.

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