Class 12 Macroeconomics Chapter 4 MCQ and Important Question answers designed for academic session 2024-25. CBSE and State board students in 12th Economics can revise the lesson 4 Determination of Income and Employment with the help of multiple choice questions and extra important questions.

Class 12 Macro Economics Chapter 4 MCQ


Consumption function is a functional relationship between

[A]. Income and savings
[B]. Price and consumption
[C]. Income and consumption
[D]. Income, consumption and savings

Propensity to consume means

[A]. Tendency of the customer towards higher consumption
[B]. Ratio of consumption to income
[C]. Level of income at which consumption expenditure is equal to income
[D]. Additional income to be spent on consumption

On accounts of injections and withdrawal, equilibrium level of income undergoes

[A]. A shift
[B]. No shift
[C]. A dispersal
[D]. No change

Deficient demand leads to

[A]. Deflationary gap
[B]. Inflationary gap
[C]. Both
[D]. None

Effective Demand Principle

In a capitalist economy, the amount of employment depends upon the amount of effective demand. The upper the level of effective demand, the bigger are the amount of employment and contrariwise. It shows that the amount of unemployment is the result of deficiency of effective demand. Hence, the amount of employment in a capitalist economy are often raised by increasing the amount of effective demand. There are different amount of aggregate demand and aggregate supply at various amount of employment, but there is a level of employment at which aggregate demand and aggregate supply are same. This point of equality is the point of effective demand.

Class 12 Economics – Effective Demand
In alternative words, effective demand is that the purpose of equality between mixture demand value and mixture supply value. It implies that effective demand is that the purpose of equality between AD and AS at tiers of employment. Hence, it determines the quantity of employment in associate degree economy at short intervals. That is why, the higher the quantity of effective demand, larger the quantity of employment and contrariwise and unemployment is the outcome of deficiency of effective demand. The essential remedy to scale back the unemployment is to lift the amount of effective demand within the economy. Effective demand is set by the interaction between aggregate demand value and aggregate supply value.

Class 12 Macro Economics Chapter 4 Important Question answers

What is ex-ante and ex-post?

To be precise, ex-ante depicts what has been planned, like what were the goals set for future to be achieved. Whereas, ex-post depicts what has actually happened, means that the goals you had set earlier, how much you have performed in accordance to them.

What is the ‘consumption’?

A consumption function describe the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as the income changes. Some consumption still take place even if the income is zero. Because this level of consumption is independent of income, it is called Autonomous consumption.

Define Investment.

Investment is defined as addition to the stock of physical capital and changes in the inventory of a producer. Investment goods are also part of the final goods-they are not intermediate goods like raw materials. Machines produced in an economy in a given year are not ‘used up’ to produce other goods but yield their services over a number of years.

What is ‘Investment Multiplier’?

When increment in equilibrium value of total output exceeds the initial increment is known as autonomous expenditure. The ratio of the total expenditure in equilibrium value of final goods output to the initial increment in autonomous expenditure is called Investment Multiplier.

What is paradox of thrift?

If all the people of the economy increase the proportion of income that they save, the total value of savings in the economy will not increase- it will either decline or remain unchanged. The result is known as the ‘paradox of thrift’, which states that as people become thriftier, they end up saving less or same as before.

Aggregate demand price (ADP)

The combination demand value is that the quantity of cash or returns that the entrepreneurs really expect to receive from the sale output created by a variety of men used. In alternative words, it refers to the expected revenue from the sale of output created at a specific level of employment. The statement showing varied mixture demand costs at completely different level of employment is named the aggregate demand price schedule or aggregate demand function.

Class 12 Macro Economics Chapter 4 Multiple Choice Questions


A tax, burden of which can be shifted on to others, is called

[A]. Direct tax
[B]. Indirect tax
[C]. Ad valorem
[D]. Specific tax

If the value of exports exceeds the value of visible imports, the current account deficit will be

[A]. Positive
[B]. Negative
[C]. Positive or Negative
[D]. None of these

Which of the following leads to increase in AD

[A]. Fall in imports
[B]. Increase in investment expenditure
[C]. Increase in government expenditure
[D]. All of these

The difference between fiscal and interest payment is called

[A]. Revenue deficit
[B]. Primary deficit
[C]. Budget deficit
[D]. Capital deficit

Aggregate supply price (ASP)

Aggregate supply is that the total value of production incurred for using an explicit given variety of labours that the entrepreneurs should cowl by merchandising the output created by that given variety of labours. In alternative words, it refers to the returns necessary from the sale of output at a specific level of employment. The statement showing varied aggregate supply values at completely different level of employment is named the aggregate supply price schedule or aggregate supply function.

Paradox of Thrift

The proper response to an economic recession is additional defrayment, additional risk-taking, and fewer savings. John Maynard Keynes economic expert (a British Economist) believed a recessed economy doesn’t turn out at full capability as a result of a number of its factors of production (land, labour, and capital) has no work to do. Keynesians conjointly argue that consumption, or defrayment, drives economic process. Thus, even supposing it is sensible for people and households to scale back consumption throughout rough times, this is often the incorrect prescription for the larger economy.

A pullback in aggregate shopper defrayment may force businesses to supply even less, deepening the recession. This disconnect between individual and cluster rationality is that the basis of the savings contradiction. An example of this was witnessed throughout the Great Recession that followed the monetary crisis of 2008. Throughout that point, the savings rate for the typical American household accumulated from a pair of 2.9 % to 5%. The FRS slashed interest rates so as to spice up defrayment within the American economy. Economic expert helped revive the circular flow model of the economy. This theory states that a rise in current defrayment drives future defrayment.

Current defrayment

Current defrayment, after all, leads to additional financial gain for current producers. Those producers rationally deploy their new financial gain, generally increasing business and hiring new employees; these new workers earn new financial gain, that then is also spent. To spice up current defrayment, economic expert argued for lower interest rates to lower current savings rates. If low interest rates don’t produce additional borrowing and defrayment. The circular flow model ignores the lesson of Say’s law, that states merchandise should be created before they will be changed.

Capital machines

Capital machines, that drive higher levels of production, need further savings and investment. The circular flow model solely works in a very framework while not capital merchandise. Also, the idea ignores the potential for inflation or deflation. If higher current defrayment causes future costs to rise concordantly, future production and employment can stay unchanged. Similarly, if current thrift throughout a recession forces future costs to fall, future production and employment needn’t decline as economic expert predicted.

Finally, the contradiction of thrift ignores the potential for saved financial gain to be lent out by banks. Once some people increase their savings, interest rates tend to fall, and banks create further loans.

Last Edited: October 24, 2022