(a) "In an economy, the autonomous consumption is ₹ 100 and Marginal Propensity to Consume (MPC) is 0.6. If th

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Q. (a) "In an economy, the autonomous consumption is ₹ 100 and Marginal Propensity to Consume (MPC) is 0.6. If the equilibrium level of Income is 2,000, then the autonomous investment is ₹ 300." Justify the statement with valid calculation.

(OR)

(b) An Economy is in equilibrium, calculate the Marginal Propensity to Save (MPS) from the following :

(i) National Income (Y) = ₹ 4,400

(ii) Autonomous Consumption (C̄) = ₹ 1,000

(iii) Investment Expenditure (I) = ₹ 70

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Part (a)Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

Part (b)Concept understanding — Marginal Propensity to Consume

Marginal Propensity to Consume (MPC)

Start with everyday intuition

Think about what happens when you get some extra money — say, a ₹500 bonus from your part-time job, or a cash gift on your birthday. You don't save all of it, and you don't spend all of it either. Most people spend a part and save the rest. That part you spend — the fraction of the extra income that goes into consumption — is exactly what economists call the Marginal Propensity to Consume.

The word "marginal" here means "extra" or "additional." So MPC answers one simple question: Out of every extra rupee you earn, how much do you spend?

The precise meaning

Formally, MPC is the ratio of change in consumption expenditure to the change in income that brought it about.

MPC = \frac{\Delta C}{\Delta Y}

For example, if your income rises by ₹1,000 and your consumption rises by ₹750, your MPC is $750/1000 = 0.75$ (or 75%). This means you spend 75 paise of every extra rupee and save the remaining 25 paise.

The other side of the coin is the Marginal Propensity to Save (MPS) — the fraction of extra income that is saved. Since every extra rupee is either spent or saved:

MPC + MPS = 1

This is not a theory; it's an accounting identity. If MPC = 0.75, then MPS must be 0.25.

Why MPC matters

MPC is not just a number — it is the engine of the multiplier effect, one of the most powerful ideas in macroeconomics.

When someone spends money, that spending becomes someone else's income. That second person, in turn, spends a fraction (their MPC) of that income, which becomes a third person's income, and so on. A single initial injection of spending — say, government investment in a road — ripples through the economy, generating total income many times larger than the original spending.

The size of this ripple depends directly on MPC. The higher the MPC, the larger the multiplier.

Multiplier\ (k) = \frac{1}{1 - MPC} = \frac{1}{MPS}

If MPC = 0.8, the multiplier is $1/(1-0.8) = 5$ . An initial ₹100 crore investment can generate ₹500 crore of total income. If MPC = 0.5, the multiplier is only 2.

A word on the diagram …

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Part (a): $C = 100 + 0.6(2000) = 1300$ , so $I = 2000 - 1300 = \text{₹}700$ — the claim of ₹300 is not justified.
Part (b): At equilibrium $S = I = 70$ ; with autonomous saving $-1000$ , $\text{MPS} = 1070/4400 \approx 0.24$ .

Part (a)

In a two-sector economy, equilibrium income occurs where aggregate demand equals aggregate supply, i.e. $Y = C + I$ . Consumption has an autonomous part $\bar{C}$ and an induced part $bY$ , where $b$ is the marginal propensity to consume; investment $I$ is autonomous.

C = \bar{C} + bY \qquad\text{and}\qquad Y = C + I

Given $\bar{C} = 100$ , $b = 0.6$ , $Y = 2000$ :

C = 100 + (0.6 \times 2000) = 100 + 1200 = 1300

Now apply the equilibrium condition:

2000 = 1300 + I \;\Rightarrow\; I = 2000 - 1300 = 700

The autonomous investment is ₹700 crore. Since the statement claims ₹300 crore, and $700 \ne 300$ , the statement is not justified. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

JKBOSE Class 12 Annual Regular Examination (Commerce) 2026Set ANNUAL1 markMCQ
$Q. MPC is equals to$
(a) Change in consumption/change in income
(b) Change in income/change in consumption
(c) Both
(a) and
(b)
(d) None of the above
›Reveal solutionSolution

MPC = Change in Consumption (ΔC) ÷ Change in Income (ΔY).

Marginal Propensity to Consume (MPC) is defined as the ratio of the change in consumption expenditure to the change in income that caused it: MPC = ΔC/ΔY. It shows what fraction of every additional unit of income a household spends on consumption (the remaining fraction, 1 − MPC, is the Marginal Propensity to Save, MPS). Its value normally lies between 0 and 1.

…

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CA Foundation 2025Set may-20251 markMCQ
$Q. Under the Keynesian theory of determination of national income, the assumption is that the consumption increases with an increase in disposable income but the increase in consumption will be _______ the increase in disposable income. (A) Equal to (B) Opposite to (C) Greater than (D) Less than$
›Reveal solutionSolution

By Keynes's fundamental psychological law, a rise in income raises consumption by less than the rise in income.

Step 1 — Keynes's psychological law of consumption

Keynes held that as disposable income increases, consumption increases too, but not by the full amount of the increase — people save a part of the additional income.

Step 2 — Express with MPC

The marginal propensity to consume measures the share of extra income that is consumed:
$MPC = \frac{\Delta C}{\Delta Y}, \qquad 0 < MPC < 1$
Since $MPC < 1$ , the change in consumption $\Delta C$ is less than the change in disposable income $\Delta Y$ . …
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CA Foundation 2025Set may-20251 markMCQ
$Q. Which of the following is true in respect of relation of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) as per the Keynesian theory of determination of National Income ? (A) MPC = MPS (B) MPC + MPS = 1 (C) MPC + MPS = 0 (D) No relation exists between MPC and MPS$
›Reveal solutionSolution

Because extra income is either spent or saved, MPC + MPS = 1.

Step 1 — Split additional income

A change in disposable income ( $\Delta Y$ ) is divided between a change in consumption ( $\Delta C$ ) and a change in saving ( $\Delta S$ ):
$\Delta Y = \Delta C + \Delta S$
Step 2 — Divide through by $\Delta Y$
$\frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y} = 1 \;\Rightarrow\; MPC + MPS = 1$
So the two marginal propensities always sum to one, and MPS = 1 − MPC.

Why the other options are wrong: (A) MPC = MPS only in the special case where each equals 0.5; it is not a general rule. (C) MPC + MPS = 0 is impossible, since both are non-negative and their sum is 1. (D) A definite relation clearly exists, so 'no relation' is wrong. …
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JKBOSE Class 12 Annual Regular Examination (Commerce) 2025Set ANNUAL1 markMCQ
$Q. When MPS = 0.4, What would be MPC?$
(a) 0.3
(b) 0.4
(c) 0.5
(d) 0.6
›Reveal solutionSolution

The correct option is (d) 0.6.

Marginal Propensity to Consume (MPC) is the fraction of an additional unit of income that is spent on consumption, and Marginal Propensity to Save (MPS) is the fraction saved. Since any additional income can only be either cons …

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JKBOSE Class 12 Annual Regular Examination (Commerce) 2025Set ANNUAL1 markMCQ
$Q. What are the components of aggregate supply?$
(a) Consumption
(b) Saving
(c) Both
(a) and
(b)
(d) None of above
›Reveal solutionSolution

The correct option is (c) Both (a) and (b).

In Keynesian macroeconomics, Aggregate Supply (AS) at any level of output is defined as the total value of output produced, which equals the income (Y) generated in producing it. By the basic income identity, whatever income is earned is necessarily disposed of in only two ways: it is either spent on consumption (C) or saved (S). Hence:

AS = Y = C + S

…

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JKBOSE Class 12 Annual Regular Examination (Commerce) 2024Set ANNUAL1 mark
$Q. When the consumption expenditure is more than the income, the value of APS will be ............... .$
›Reveal solutionSolution

When consumption expenditure is greater than income, saving is negative (dissaving), and therefore APS, which is Saving divided by Income, is also negative.

By definition, Saving (S) = Income (Y) − Consumption (C). Average Propensity to Save (APS) is calculated as S/Y. If consumption expenditure exceeds income (C > Y), this means the household is spending more than it earns — financing the gap by drawing down past savings or borrowing. In this situation, S = Y − C becomes a negative number, since C > Y. Dividing this negative savin …

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JKBOSE Class 12 Annual Regular Examination (Commerce) 2023Set ANNUAL1 mark
$Q. Give two examples of leakages from the circular flow in the economy.$
›Reveal solutionSolution

Leakages are any outflows of money from the income-expenditure circular flow that are not immediately passed on as further spending, reducing the size of subsequent rounds of income generation.

In the circular flow of income model, income flows from firms to households (as factor payments) and back from households to firms (as consumption expenditure). A leakage (or withdrawal) is any part of income that households (or firms) do NOT spend on buying domestically produced goods and services, so it exits the circular flow. Common examples include: (i) Savings (S) -- the part of income households keep rather than spend; (ii) Taxes (T) -- money paid to the government rather than spent on firms' output; and (iii) Imports (M) -- money spent on goods bought from abroad rather than domestic firms. L …

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Q.(a) "In an economy, the autonomous consumption is ₹ 100 and Marginal Propensity to Consume (MPC) is 0.6. If the equilibrium level of Income is 2,000, then the autonomous investment is ₹ 300." Justify the statement with valid calculation.

Part (a)

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