(a) "If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an unintended accumulation of inventories." Do you agree with the given statement? Give valid reasons in support of your answer. OR (b) Complete the following table. Construct the consumption function at ₹ 200 crore level of income. | Table columns: Income (Y) (in ₹ crore) | Savings (S) (in ₹ crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) | | --- | --- | --- | --- | | Rows: 0 | (–) 50 | – | – ; | | 100 | ........ | 1 | ........ ; | | 200 | ........ | 3/4 | ........ ; | | 300 | ........ | 2/3 | ........ |

(a) "If actual demand for final goods falls short of the actual output of final goods corresponding to full em

Question 70 of 104

"If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an unintended accumulation of inventories." Do you agree with the given statement? Give valid reasons in support of your answer. OR
Complete the following table. Construct the consumption function at ₹ 200 crore level of income.

Table columns: Income (Y) (in ₹ crore)	Savings (S) (in ₹ crore)	Average Propensity to Consume (APC)	Marginal Propensity to Save (MPS)
Rows: 0	(–) 50	–	– ;
100	........	1	........ ;
200	........	3/4	........ ;
300	........	2/3	........

Jharkhand JacCBSE Class XII Board 2024Subjective· 4mImportance★★★★★

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Part (a)Concept understanding — Inventory Investment

Inventory Investment: The Stock That Keeps the Economy Moving

Think of a shop that sells notebooks. The shopkeeper doesn't wait for a customer to walk in and then rush to the factory to order one notebook. Instead, she keeps a pile of notebooks in the back room — her inventory. When she buys 100 new notebooks from the wholesaler, but sells only 80 that month, the remaining 20 become part of her inventory. That change — the addition of those 20 notebooks to her stock — is inventory investment.

Now, here's the twist: inventory investment can be positive (stock increases), negative (stock decreases), or zero (stock stays the same). And it's happening all over the economy — in factories, warehouses, shops, and even your own kitchen pantry.

The Precise Meaning

In macroeconomics, inventory investment is the change in the stock of unsold goods held by firms during a given period. It is a component of Gross Domestic Product (GDP).

The NCERT Class-12 textbook (Macroeconomics, Chapter 2) gives the expenditure method identity:

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

Where:

$C$ = Private final consumption expenditure (households buying goods and services)
$I$ = Gross investment (includes both fixed investment and inventory investment)
$G$ = Government final consumption expenditure
$X$ = Exports
$M$ = Imports

Now, $I$ itself is split into two parts:

I = I_{fixed} + \Delta I_{inventory}

Where:

$I_{fixed}$ = Investment in fixed assets (machinery, buildings, factories)
$\Delta I_{inventory}$ = Inventory investment = Change in stock of unsold goods

Note

$\Delta$ (delta) means "change in". So $\Delta I_{inventory}$ is the change in inventories — not the total stock. If a firm had ₹10 lakh worth of goods at the start of the year and ₹12 lakh at the end, inventory investment = +₹2 lakh.

Why It Matters: The Shock Absorber

Inventory investment is the economy's shock absorber. Here's why:

1. It makes GDP add up correctly

Imagine a factory produces 100 cars in a year, but only 80 are sold. The 20 unsold cars don't vanish — they sit in the factory lot. In GDP accounting, those 20 cars are counted as inventory investment by the firm. Without this, GDP would undercount actual production.

2. It signals future production

If inventories are piling up (positive inventory investment), firms may cut production next quarter. If inventories are shrinking (negative inventory investment), firms may ramp up production. This is why economists watch inventory data closely — it's a leading indicator of economic cycles.

3. The "unplanned" part is crucial

Firms plan to hold some inventory (say, enough to cover 2 weeks of sales). But when demand suddenly drops, they end up with unplanned inventory accumulation. When demand surges, they experience unplanned inventory depletion. This unplanned part is what drives business cycles.

Watch out

A common mistake: students think inventory investment is always a good thing. It's not. A sudden rise in inventories often means goods aren't selling — a sign of economic trouble. A fall in inventories can mean strong demand — a good sign.

A Simple Diagram (in words)

Draw a horizontal line representing time (say, one year). At the start, a firm has 100 units in stock. During the year, it produces 500 units and sells 480 units. So at year-end, stock = 100 + 500 - 480 = 120 units. The inventory investment = 120 - 100 = +20 units.

If instead it sold 520 units (more than it produced), stock would fall to 80 units, and inventory investment = 80 - 100 = -20 units.

The NCERT Connection …

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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(a) Yes — when aggregate demand falls short of full-employment output, unsold goods accumulate as unintended inventories, a disequilibrium signal that contracts output toward a lower equilibrium.

(b) Using $Y=C+S$ , savings are 0, 50, 100 at $Y=100,200,300$ ; MPS is a constant 0.5; at $Y=200$ crore $C=150$ crore, so $C=50+0.5Y$ .

Part (a)

In the simple Keynesian model, equilibrium income requires planned aggregate demand $=$ output. Full employment fixes the maximum output the economy can produce, but nothing guarantees demand will be large enough to buy it all.

When actual demand for final goods is less than full-employment output, firms cannot sell all they have made. The shortfall shows up as unintended inventory accumulation — stocks the firms did not plan to hold. Because inventory investment is part of investment in the national accounts, this build-up is unplanned and reflects excess supply.

Watch out

Distinguish planned inventory investment (a deliberate business decision) from unintended inventory accumulation (a symptom of deficient demand). Only the latter signals disequilibrium. …

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

Showing the 12 most recent of 14 on this concept.

JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. What does the term investment mean in the context of economics?$
(a) Purchasing of shares
(b) Purchasing of land
(c) Spending the money in insurance plan
(d) An increment in stock of capital goods
›Reveal solutionSolution

Investment in economics = addition to the stock of capital goods.

In economics, investment means the addition to the stock of capital goods (machines, buildings, inventories) in the economy during a period — i.e. capital formation. Buying shares, land or an insurance policy is only a transfer of existing assets/financial saving, n …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. If the consumption expenditure of consumers remains unchanged due to change in income, then what will be the value of MPC?$
(a) Greater than 1
(b) 1
(c) 0
(d) Less than 0
›Reveal solutionSolution

Unchanged consumption with changing income → MPC = 0.

The marginal propensity to consume MPC = ΔC/ΔY (change in consumption ÷ change in income). If consumption remains unchanged when income changes, the …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Which one is true?$
(a) MPC + MPS = 1
(b) MPC + MPS > 1
(c) MPC + MPS < 1
(d) MPC + MPS = 0
›Reveal solutionSolution

MPC + MPS = 1.

Any additional income (ΔY) is either consumed (ΔC) or saved (ΔS): ΔY = ΔC + ΔS. Dividing by ΔY gives ΔC/ΔY + ΔS/ΔY = 1, i.e. MPC + MPS = 1. So the two marg …

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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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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. Which is included in inventories?$
(a) Unsold finished goods
(b) Raw materials
(c) Semi-finished goods
(d) All of these
›Reveal solutionSolution
Inventories include finished, semi-finished and raw-material stocks.

Inventory (stock) is the stock of unsold or unused goods a firm holds. It includes:

Unsold finished goods (produced but not yet sold),

Semi-finished goods (work in progress), and

Raw materials (not yet used in production). …
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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. What is called the ratio of change in investment and change in income called?$
(a) Marginal Propensity to Consume (MPC)
(b) Multiplier
(c) Average Propensity to Consume (APC)
(d) All of these
›Reveal solutionSolution

The ratio connecting a change in investment and the change in income is the multiplier.

The investment multiplier (k) shows the relationship between a change in investment and the resulting change in national income: k = ΔY / ΔI. An initial increase in investment raises income by a multiple of itself through successive rounds of spending. Hence the ratio conn …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. If Marginal Propensity to Consume (MPC) in an economy is 0.6, then what will be the value of Marginal Propensity to Save (MPS)?$
(a) 0.6
(b) 0.4
(c) 2.5
(d) 1.7
›Reveal solutionSolution

MPS = 1 − MPC = 1 − 0.6 = 0.4.

Since income is either consumed or saved, the marginal propensity to consume and the marginal propensity to save always add up to one: MPC + MPS …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. The marginal propensity to consume measures the slope of which function?$
(a) Production function
(b) Investment function
(c) Utility function
(d) Consumption function
›Reveal solutionSolution

MPC is the slope of the consumption function.

The marginal propensity to consume (MPC = ΔC/ΔY) measures the change in consumption resulting from a change in income. Graphically, this is the slope of the consumption function C = A + bY, where b …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. If the value of the multiplier in an economy is 4, then what will be the value of the marginal propensity to save?$
(a) 0.25
(b) 0.75
(c) 2.5
(d) 4
›Reveal solutionSolution

MPS = 1/multiplier = 1/4 = 0.25.

The investment multiplier k = 1/MPS, so MPS = 1/k. Here the multiplier k = 4, so MPS = 1/4 = 0.25. (Check: MPC = 1 − …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. The autonomous consumption in the consumption function C = A + bY is$
(a) C
(b) A
(c) B
(d) bY
›Reveal solutionSolution

In C = A + bY, 'A' is autonomous consumption.

In the consumption function C = A + bY: A is the autonomous consumption (consumption even when income is zero), b is the marginal propensity to consume (slope), and bY is the inc …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. If the value of MPS in an economy is 0.2, then what will be the value of multiplier?$
(a) 0.4
(b) 5
(c) 2.5
(d) 4
›Reveal solutionSolution

Multiplier = 1/MPS = 1/0.2 = 5.

The investment multiplier is the reciprocal of the marginal propensity to save: k = 1/MPS = 1/(1 − MPC). Here MPS = 0.2, so k = 1/0.2 = 5. This means an initial inc …

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