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Economics · Class 12 Commerce

Ch 4Consumption and Investment Functions — Class 12 Economics, concept-first.

The consumption function expresses the relationship between total consumption expenditure (C) and the level of national income (Y) in an economy — written generally as , and commonly modelled in its simplest linear form as:

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Consumption Function — APC and MPC

The consumption function C=a+bY relates consumption to income, with a=autonomous consumption and b=MPC (slope). Keynes's psychological law of consumption states consumption rises with income but by a smaller amount (0<MP…

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CA Foundation

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Chapter contents

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1

The Consumption Function — Keynes's Psychological Law and APC/MPC

The consumption function expresses the relationship between total consumption expenditure (C) and the level of national income (Y) in an economy — written generally as , and commonly modelled in its s…

2

The Saving Function — APS, MPS and the Consumption-Saving Identity

Since a household's income can only be spent (consumed) or set aside (saved), income is always divided, by definition, into exactly these two uses:

3

Investment — Meaning, Types and Determinants

In economics, investment refers specifically to expenditure on NEW capital goods — machinery, factory buildings, tools, and additions to inventory stock — that add to an economy's productive capacity.…

4

The Investment Multiplier

The investment multiplier (k) measures how much TOTAL national income changes for a GIVEN initial change in autonomous investment — capturing the idea that an initial injection of investment spending…

5

The Acceleration Principle

While the multiplier explains how a change in INVESTMENT causes a (larger) change in INCOME, the acceleration principle explains the REVERSE causal direction: how a change in the level of OUTPUT (or i…

6

Equilibrium Level of Income — The Consumption-Investment (C+I) Approach

In a simple two-sector economy (households and firms only, no government or foreign trade), total planned expenditure (Aggregate Demand) consists of just consumption and investment: .

Exercises

+Show 4 questions4 questions
  1. Q5State Keynes's Fundamental Psychological Law of Consumption in your own words, and explain why it implies that the Marginal Propensity to Co…Free
  2. Q6Distinguish between autonomous investment and induced investment, giving one example of each.Free
  3. Q7Explain the key difference between the multiplier and the acceleration principle in terms of the direction of causation each describes.Preview
  4. Q8Why must the equilibrium level of national income found using the Y=C+I approach always be identical to the equilibrium found using the S=I…Preview

Sample & Board Papers

Sample papers and previous-year board questions for this subject.

+Show 29 questions29 questions
  1. Q1Lower interest rates are likely to : (a) Increase borrowing and spending (b) Decrease in consumption (c) Increase cost of borrowing (d) Enco…Preview
  2. Q2The Multiplier is calculated as : (a) 1/(1 – MPC) (b) 1/MPS (c) 1/MPC (d) (a) and (b)Preview
  3. Q3The term Super Multiplier was first used by : (a) Keynes (b) J.R. Hicks (c) R.G.D. Allen (d) KahnPreview
  4. Q4Define Multiplier.Preview
  5. Q5Specify the uses of Multiplier.Preview
  6. Q6(a) Describe the types of unemployment. OR (b) Explain Keynes Psychological law of consumption function with diagram.Preview
  7. Q7The Average Propensity to consume is measured by : (a) Y/C (b) C/Y (c) C+Y (d) C x YPreview
  8. Q8The term MEC was introduced by : (a) Ricardo (b) Adam Smith (c) Malthus (d) J.M. KeynesPreview
  9. Q9What do you mean by propensity to consume ?Preview
  10. Q10Mention the kinds of Multiplier. Give any two uses of multiplier.Preview
  11. Q11(a) Explain the operation of the Accelerator. OR (b) Describe different types of planning.Preview
  12. Q12The Multiplier is calculated as ________. (a) 1/(1 - MPC) (b) 1/MPS (c) 1/MPC (d) (a) and (b)Preview
  13. Q13Define 'Multiplier'.Preview
  14. Q14Differentiate between Autonomous and Induced investment.Preview
  15. Q15(a) Explain Keynes' Psychological law of Consumption function with diagram. OR (b) Explain the differences between Classical theory and Keyn…Preview
  16. Q16The sum of the MPC and MPS is : (a) 0.1 (b) 1 (c) 1.1 (d) 2Preview
  17. Q17The average propensity to consume is measured by : (a) Y/C (b) C/Y (c) C + Y (d) CYPreview
  18. Q18(a) Describe the phases of Trade Cycle. OR (b) Write a note on : (i) Public Debt (ii) Primary deficitPreview
  19. Q19If the MPC is 0.5, the value of multiplier is __________. (a) 0.2 (b) 2 (c) 20 (d) 1/2Preview
  20. Q20The value of multiplier is __________. (a) 1/(1−MPC) (b) 1/MPS (c) 1/MPC (d) Both (a) and (b)Preview
  21. Q21What is meant by “Propensity to Consume” ?Preview
  22. Q22Define Marginal Propensity to Save (MPS).Preview
  23. Q23Mention the differences between Accelerator and Multiplier effect.Preview
  24. Q24(a) What are the differences between Marginal Efficiency of Capital (MEC) and Marginal Efficiency of Investment (MEI) ? OR (b) Illustrate Ir…Preview
  25. Q25The sum of MPC and MPS is ______. (a) 0.1 (b) 1 (c) 1.1 (d) 2Preview
  26. Q26What is Consumption Function ?Preview
  27. Q27What is Autonomous Investment ?Preview
  28. Q28Write about Super Multiplier.Preview
  29. Q29(a) Illustrate the working of Multiplier. OR (b) Describe the different phases of Trade Cycle.Preview

More questions

+Show 4 questions4 questions
  1. Example 1A household's consumption function is $C=100+0.75Y$ (in Rs. crore). At income Y = Rs. 800 crore, find (a) consumption C, (b) APC, (c) MPC, (…Free
  2. Example 2If the Marginal Propensity to Consume (MPC) in an economy is 0.8, calculate the investment multiplier. If autonomous investment increases by…Free
  3. Example 3In a two-sector economy, the consumption function is $C=60+0.6Y$ (Rs. crore) and autonomous investment is $I=40$ (Rs. crore). Find the equil…Preview
  4. Example 4In an economy, national output rises by Rs. 100 crore in a given year. If the capital-output ratio (accelerator coefficient) is 3, calculate…Preview