Chapter 2

National income computation

Q1: What is aggregate demand?

Answer: Aggregate demand is the total demand for final goods and services in an economy at a given level of income during a given period.

Q2: Determine the income multiplier if the marginal propensity to save (MPS) is 0.3.

Answer:
Income multiplier (k) = 1 / MPS
= 1 / 0.3
= 3.33

Q3: The ratio of change in consumption to change in income is called...?

Answer: Marginal Propensity to Consume (MPC)

Q4: What is aggregate supply?

Answer: Aggregate supply is the total value of final goods and services that producers are willing and able to supply in an economy during a given period.

Q5: What is involuntary unemployment?

Answer: Involuntary unemployment refers to a situation where people are willing to work at the prevailing wage rate but cannot find jobs.

Q6: What is the significance of the 45° line in the Keynesian income model?

Answer: The 45° line shows all points where aggregate demand equals aggregate supply, indicating equilibrium income levels.

Q7: If the value of MPS is zero, what is the value of MPC?

Answer: MPC = 1

Q8: What is autonomous consumption expenditure?

Answer: It is the consumption expenditure that occurs even when income is zero. It does not depend on income.

Q9: What is excess demand?

Answer: Excess demand occurs when aggregate demand exceeds the level of output at full employment.

Q10: What is investment?

Answer: Investment is the expenditure on capital goods such as machinery, equipment, and buildings used for future production.

Q11: What is marginal propensity to consume (MPC)?

Answer: It is the ratio of change in consumption to the change in income.
MPC = ΔC / ΔY

Q12: What is marginal propensity to save (MPS)?

Answer: It is the ratio of change in savings to the change in income.
MPS = ΔS / ΔY

Q13: What is consumption expenditure?

Answer: It is the total expenditure by households on goods and services for their personal use.

Q14: What is net export?

Answer: Net export is the difference between the value of exports and imports of goods and services.
Net Export = Exports – Imports

Q15: What does ‘expected’ mean in economics?

Answer: It means "planned."

Q16: What is the consumption function?

Answer: It is the relationship between total consumption and total income in an economy.

Q17: What is average propensity to consume (APC)?

Answer: APC is the ratio of total consumption to total income.
APC = C / Y

Q18: What is average propensity to save (APS)?

Answer: APS is the ratio of total savings to total income.
APS = S / Y

Q19: What is autonomous investment?

Answer: It is the investment that does not change with changes in income. Usually done by the government.

Q20: What is induced investment?

Answer: Investment that changes with changes in income, production, or profit.

Q21: What is voluntary unemployment?

Answer: It refers to people who choose not to work even when jobs are available.

Q22: What is the multiplier?

Answer: It is the ratio of change in income to the change in investment.
k = ΔY / ΔI

Q23: If MPS = 1, what is MPC?

Answer: MPC = 0

Q24: If MPC = 0.25, what is the value of the multiplier?

Answer:
k = 1 / (1 - MPC) = 1 / (1 - 0.25) = 1 / 0.75 = 1.33

Q25: What is Say’s Law of Markets?

Answer: "Supply creates its own demand."

Q26: What is unplanned inventory accumulation?

Answer: When actual supply exceeds planned demand, leading to unsold goods.

Q27: What is a saving function?

Answer: It is the relationship between income and savings. Represented as: S = f(Y)

Q28: What is the relationship between MPC and MPS?

Answer:
MPC + MPS = 1

Q29: Why is MPC never greater than 1?

Answer: Because a part of the income is saved, MPC must be ≤ 1.

Q30: What is marginal efficiency of investment (MEI)?

Answer: MEI is the expected rate of return from an additional unit of investment.

Q31: What is effective demand?

Answer: When aggregate demand equals aggregate supply, resulting in equilibrium income and employment.

Q32: What is the maximum value of the multiplier?

Answer: Infinity, when MPS = 0 and MPC = 1.

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