“Income of an economy increased from ₹ 20,000 to ₹ 50,000 crore. Savings of the economy increased from ₹ 2,000

Question 97 of 104

Q. “Income of an economy increased from ₹ 20,000 to ₹ 50,000 crore. Savings of the economy increased from ₹ 2,000 crore to ₹ 10,000 crore.”

(i) Calculate Average Propensity to Consume (APC) and Average Propensity to Save (APS), before and after the rise in income.

(ii) Draw appropriate conclusion regarding the behaviour of Average Propensity to Consume (APC) as his income increases.

(OR)

“Under a study, examining the spending habits of a hypothetical economy, it was observed that even households with zero income managed to consume basic necessities. As the income of people increased, their consumption also increased, but not as rapidly as income.” Based on the given text and common understanding, answer the following questions :

(i) Identify and elaborate the type of consumption indicated in the first para of the above text.

(ii) Explain, the reason behind the positive slope of Aggregate Demand Curve.

Jharkhand JacCBSE Class XII Board 2026Subjective· 6mImportance★★★★★

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Part (a)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 …

Part (b)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. …

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Part (a): Before — APC = 0.9, APS = 0.1; After — APC = 0.8, APS = 0.2; APC falls as income rises. Part (b): consumption at zero income is autonomous consumption, and the AD curve slopes upward because a positive MPC makes consumption (and total expenditure) rise with income.

Part (a): Calculating APC and APS

APC = \frac{C}{Y}, \quad APS = \frac{S}{Y}, \quad APC + APS = 1, \quad C = Y - S

Before the rise in income ( $Y = 20{,}000$ , $S = 2{,}000$ ):

C = 20{,}000 - 2{,}000 = 18{,}000 \text{ crore}

APC = \frac{18{,}000}{20{,}000} = 0.9, \qquad APS = \frac{2{,}000}{20{,}000} = 0.1

After the rise in income ( $Y = 50{,}000$ , $S = 10{,}000$ ):

C = 50{,}000 - 10{,}000 = 40{,}000 \text{ crore}

APC = \frac{40{,}000}{50{,}000} = 0.8, \qquad APS = \frac{10{,}000}{50{,}000} = 0.2

Both check out, since $0.9 + 0.1 = 1$ and $0.8 + 0.2 = 1$ . …

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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 18 on this concept.

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
$Q. Which of the following is not a component of aggregate demand?$
(a) Consumption expenditure
(b) Investment expenditure
(c) Net export
(d) Expenditure on financial assets
›Reveal solutionSolution

Expenditure on financial assets is not part of aggregate demand.

Aggregate demand = consumption expenditure (C) + investment expenditure (I) + government expenditure (G) + net exports (X − M). Expenditure on financial assets (buying shares, bonds) is only a transfer of existing assets, not spending on newly p …

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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
$Q. In the situation of inflation$
(a) prices of goods decrease
(b) prices of goods increase
(c) value of money increases
(d) production decreases
›Reveal solutionSolution

In inflation, prices of goods increase.

Inflation is a situation in which there is a sustained rise in the general price level of goods and services in an economy over time. As prices rise, the value (purchasing power) of money falls. It usually occurs when aggregate demand exceeds aggregate s …

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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) 2024Set ANNUAL1 markMCQ
$Q. How does an increase in the marginal propensity to consume affect aggregate demand?$
(a) There is no change in the aggregate demand curve
(b) The slope of the aggregate demand curve will increase
(c) The aggregate demand curve will shift to the right
(d) The aggregate demand curve will shift to the left
›Reveal solutionSolution

A higher MPC increases the slope of the aggregate demand curve.

The slope of the aggregate demand (consumption + investment) curve depends on the marginal propensity to consume, because MPC is the slope of the consumption function. When MPC increases, each extra rupee of income raises consumption (and hence AD) by more, so the AD curve becomes **steeper — its slope …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. "Supply creates its own demand." Who said this?$
(a) J. B. Say
(b) Adam Smith
(c) Marshall
(d) Pigou
›Reveal solutionSolution

'Supply creates its own demand' is Say's Law, stated by J. B. Say.

The classical proposition that production (supply) generates enough income to buy the whole output, so there can be no general over-production, is known as Say's Law of Markets, named after the French economist Jean-Baptiste Say. Keynes later crit …

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Q.“Income of an economy increased from ₹ 20,000 to ₹ 50,000 crore. Savings of the economy increased from ₹ 2,000 crore to ₹ 10,000 crore.”

Part (a): Calculating APC and APS

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