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Questions and Answers
Autonomous consumption is denoted by ______ and shows the consumption which is independent of income.
Autonomous consumption is denoted by ______ and shows the consumption which is independent of income.
C
The induced component of consumption shows the dependence of consumption on ______.
The induced component of consumption shows the dependence of consumption on ______.
income
When income rises by Re 1, induced consumption rises by ______, i.e., c or the marginal propensity to consume.
When income rises by Re 1, induced consumption rises by ______, i.e., c or the marginal propensity to consume.
MPC
The maximum value which MPC can take is ______.
The maximum value which MPC can take is ______.
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Generally, MPC lies between ______ and 1 (inclusive of both values).
Generally, MPC lies between ______ and 1 (inclusive of both values).
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The basic objective of macroeconomics is to develop theoretical tools called ______.
The basic objective of macroeconomics is to develop theoretical tools called ______.
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The assumption of ______ means 'other things remaining equal'.
The assumption of ______ means 'other things remaining equal'.
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Planned investment is different from actual investment, which is also known as ______ investment.
Planned investment is different from actual investment, which is also known as ______ investment.
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In this chapter, we deal with the determination of National Income under the assumption of fixed ______ of final goods.
In this chapter, we deal with the determination of National Income under the assumption of fixed ______ of final goods.
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The planned investment in the example was Rs ______.
The planned investment in the example was Rs ______.
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The theoretical model used in this chapter is based on the theory given by ______ Maynard Keynes.
The theoretical model used in this chapter is based on the theory given by ______ Maynard Keynes.
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Due to increased demand, the producer sold goods worth Rs ______ from her stock.
Due to increased demand, the producer sold goods worth Rs ______ from her stock.
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Consumption, investment, and GDP are terms related to the total output of final goods and ______ in an economy.
Consumption, investment, and GDP are terms related to the total output of final goods and ______ in an economy.
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Actual or accounting values are referred to as ______ measures of these items.
Actual or accounting values are referred to as ______ measures of these items.
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At the end of the year, the inventory increased by Rs ______.
At the end of the year, the inventory increased by Rs ______.
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The simplest consumption function assumes a constant rate of change in consumption as income changes, represented by the equation ______.
The simplest consumption function assumes a constant rate of change in consumption as income changes, represented by the equation ______.
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Consumption may denote not what people have actually consumed but what they had planned to ______ during the same period.
Consumption may denote not what people have actually consumed but what they had planned to ______ during the same period.
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It is challenging to account for all the variables at the same time when analyzing ______.
It is challenging to account for all the variables at the same time when analyzing ______.
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Even if income is zero, households still engage in some level of consumption, called ______ consumption.
Even if income is zero, households still engage in some level of consumption, called ______ consumption.
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To understand income determination, we need to know the planned values of different components of aggregate ______.
To understand income determination, we need to know the planned values of different components of aggregate ______.
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The measure of what has been planned is called ______ measures.
The measure of what has been planned is called ______ measures.
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Study Notes
Determination of Income and Employment
- Macroeconomics aims to develop models for understanding variables like national income, price level, and interest rates.
- Models analyze the processes determining variable values, like slow growth, recessions, price level increases, and unemployment.
- The assumption of ceteris paribus (other things being equal) is crucial in isolating the effect of one variable in a model.
- The analysis involves solving for one variable (like x) in terms of another (like y), then substituting this value into the other equation.
Aggregate Demand and Its Components
- Aggregate demand comprises consumption, investment, and total output (GDP).
- These terms have dual definitions; they can refer to actual values in a specific year (ex post) or planned/expected values (ex ante).
- Ex ante measures represent planned values, while ex post measures represent actual values.
- Consumption depends on household income, with a constant rate change. Autonomous consumption occurs even at zero income.
- The consumption function expresses consumption (C) in terms of income (Y): C = C + cY, where C is autonomous consumption and 'c' is the marginal propensity to consume (MPC). MPC shows how consumption changes with income fluctuation.
- Investment represents additions to physical capital (machinery, buildings) and inventory changes. Investment is often treated as exogenous or constant.
- Investment decisions hinge on the market interest rate, but are assumed constant for simplification here.
Investment
- Investment is defined as additions to physical capital (machines, buildings, etc.) and inventory changes.
- Investment decisions, while influenced by interest rates, are here assumed to be constant across time.
Determination of Income in a Two-Sector Model
- In a two-sector model (without government), aggregate demand is the sum of consumption and investment.
- Equilibrium is when planned aggregate demand equals actual output (or GDP).
- This is represented as Y = C + I + cY, where A = C + I is total autonomous expenditure.
Determination of Equilibrium Income in the Short Run
- Equilibrium is reached when aggregate supply equals aggregate demand at a fixed price level.
- A change in autonomous expenditure directly impacts equilibrium output in a proportionate manner, amplified by a multiplier effect.
- At equilibrium, planned aggregate demand and planned aggregate supply are equal.
Some More Concepts
- Full employment income involves all factors of production being utilized.
- Equilibrium output might be above or below full employment.
- Deficient demand occurs if equilibrium is below full employment, resulting in lower prices over time.
- Excess demand occurs if equilibrium is above full employment, resulting in higher prices over time.
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Description
This quiz covers the fundamental concepts of macroeconomics, focusing on the determination of income and employment. It explores models of aggregate demand, including its components such as consumption and investment, and the distinction between planned and actual values. Test your understanding of these key macroeconomic principles.
