Top 60 Important Questions for Class 12 Macroeconomics Chapter 7 | Aggregate Demand & Supply Notes with Free PDF | Economics Class 12 |
Class 12 Macroeconomics
Chapter 7: Aggregate Demand, Aggregate Supply and Related Concepts
Top 60 Essential Questions & Answers
Aggregate Demand (AD) & Aggregate Supply (AS)
Q1
What is Aggregate Demand (AD)?
Answer: Aggregate Demand refers to the total planned demand for all final goods and services in an economy during an accounting year.
Q2
What are the two main components of AD in a two-sector economy?
Answer: Consumption (C) and Investment (I).
Q3
What are the components of AD in an open economy?
Answer: AD = C + I + G + (X - M) (Consumption + Investment + Government Expenditure + Net Exports).
Q4
Is AD an actual expenditure or a planned expenditure?
Answer: It is a planned (ex-ante) expenditure.
Q5
What is the relationship between Income (Y) and AD?
Answer: A positive relationship. As income increases, AD also increases.
Q6
What is Aggregate Supply (AS)?
Answer: AS is the total value of output (goods and services) planned to be produced by all producers in an economy during a year.
Q7
Which macroeconomic variable is exactly equal to AS?
Answer: National Income (Y). Therefore, AS = Y.
Q8
What is the slope of the AS curve?
Answer: It is a 45-degree straight line starting from the origin.
Q9
Why is the AS curve 45-degrees?
Answer: Because income (Y) is always either consumed (C) or saved (S). (Y = C + S).
Q10
What are the two components of AS?
Answer: Consumption (C) and Saving (S).
Consumption Function (APC & MPC)
Q11
What is the Consumption Function?
Answer: It shows the functional relationship between Income (Y) and Consumption (C).
Q12
What is Autonomous Consumption (C̄)?
Answer: The minimum level of consumption at zero level of income (necessary for basic survival).
Q13
Can consumption ever be zero?
Answer: No, because a minimum level of consumption is always required for survival.
Q14
What is Average Propensity to Consume (APC)?
Answer: The ratio of total consumption to total income. (APC = C / Y).
Q15
Can APC be greater than 1?
Answer: Yes, before the break-even point when consumption is greater than income.
Q16
Can APC ever be zero?
Answer: No, because consumption (C) is never zero.
Q17
What happens to APC as income increases?
Answer: APC continuously falls.
Q18
What is Marginal Propensity to Consume (MPC)?
Answer: The ratio of change in consumption to change in income. (MPC = ΔC / ΔY).
Q19
What is the value range of MPC?
Answer: Between 0 and 1. (0 ≤ MPC ≤ 1).
Q20
Can MPC be greater than 1?
Answer: No, because the change in consumption cannot exceed the change in income.
Q21
What does an MPC of 1 signify?
Answer: It means the entire additional income is consumed (saving is zero).
Q22
What represents the slope of the consumption curve?
Answer: Marginal Propensity to Consume (MPC).
Q23
What is the algebraic equation for the consumption function?
Answer: C = C̄ + bY (Here, 'b' stands for MPC).
Saving Function (APS & MPS)
Q24
What is the Saving Function?
Answer: It shows the functional relationship between Income (Y) and Saving (S).
Q25
What is Average Propensity to Save (APS)?
Answer: The ratio of total saving to total income. (APS = S / Y).
Q26
Can APS be negative?
Answer: Yes, when consumption exceeds income, saving becomes negative (dissaving).
Q27
Can APS be 1 or more than 1?
Answer: No, because saving can never be equal to or greater than total income.
Q28
What is Marginal Propensity to Save (MPS)?
Answer: The ratio of change in saving to change in income. (MPS = ΔS / ΔY).
Q29
What is the value range of MPS?
Answer: Between 0 and 1. (0 ≤ MPS ≤ 1).
Q30
What represents the slope of the saving curve?
Answer: Marginal Propensity to Save (MPS).
Q31
What is the algebraic equation for the saving function?
Answer: S = -C̄ + (1-b)Y.
Relationships (Break-even & Propensities)
Q32
What is the break-even point?
Answer: The point where income equals consumption (Y = C) and saving is zero.
Q33
What is the value of APC at the break-even point?
Answer: 1 (since C and Y are equal).
Q34
What is the value of APS at the break-even point?
Answer: 0 (since S = 0).
Q35
What is the relationship between APC and APS?
Answer: Their sum is always equal to 1. (APC + APS = 1).
Q36
What is the relationship between MPC and MPS?
Answer: Their sum is always equal to 1. (MPC + MPS = 1).
Q37
Why does MPC + MPS = 1?
Answer: Because any additional income is either consumed or saved (ΔY = ΔC + ΔS).
Q38
If MPC in an economy is 0.75, what is MPS?
Answer: 1 - 0.75 = 0.25.
Q39
If APS is 0.2, what is APC?
Answer: 1 - 0.2 = 0.8.
Q40
Why is saving negative at zero income?
Answer: Because people consume from past savings for survival (due to autonomous consumption).
Investment Concepts
Q41
What is Investment in macroeconomics?
Answer: An addition to the capital stock of the economy (e.g., buying machinery, constructing buildings).
Q42
What is Induced Investment?
Answer: Investment driven by the profit motive and directly dependent on the level of income.
Q43
What is Autonomous Investment?
Answer: Investment that is independent of the level of income (remains constant even if income changes). It is generally made by the government.
Q44
Which type of investment is assumed in Keynesian theory?
Answer: Autonomous Investment.
Q45
What is the shape of the autonomous investment curve?
Answer: A horizontal straight line parallel to the X-axis.
Q46
What two factors determine investment demand?
Answer: Marginal Efficiency of Investment (MEI) and the Rate of Interest.
Ex-Ante and Ex-Post Variables
Q47
What does 'Ex-ante' mean?
Answer: Planned, expected, or intended value.
Q48
What does 'Ex-post' mean?
Answer: Actual or realized value measured at the end of the year.
Q49
What is Ex-ante Saving?
Answer: The amount of saving that households plan to save at different levels of income in the economy.
Q50
What is Ex-ante Investment?
Answer: The amount of investment that firms plan to invest during a given time period.
Q51
What is the relationship between Ex-post Saving and Ex-post Investment?
Answer: They are always equal to each other in an accounting sense (Ex-post S = Ex-post I).
Numerical Equations & Logic Tests
Q52
Given the equation: C = 40 + 0.60Y. What does 40 represent?
Answer: Autonomous Consumption (C̄).
Q53
In the above equation, what does 0.60 represent?
Answer: Marginal Propensity to Consume (MPC).
Q54
Derive the Saving function based on the above equation.
Answer: S = -40 + 0.40Y. (Since -C̄ = -40 and MPS = 1 - 0.60 = 0.40).
Q55
True or False: If APC is less than 1, APS must be positive.
Answer: True. Because APC + APS = 1. If APC is less than 1, the remaining portion must equal a positive APS.
Q56
True or False: MPS can never be negative.
Answer: True. Because saving does not decrease when income increases, the change in saving (ΔS) cannot be negative.
Q57
In a linear consumption function, does MPC change or remain constant?
Answer: It remains constant. The slope of a linear curve is always constant.
Q58
If National Income is ₹1000 crore and Total Consumption is ₹800 crore, what is APC?
Answer: APC = C / Y = 800 / 1000 = 0.8.
Q59
If ΔY = 100 and ΔS = 20, what is MPC?
Answer: First, find MPS: 20 / 100 = 0.2. Then find MPC: 1 - 0.2 = 0.8.
Q60
What is it called when the consumption line and the 45-degree line intersect?
Answer: The Break-even point (Where C = Y).
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