Question 1

Q1: 1. What is marginal propensity to consume? How is it related to marginal propensity to save?

Accepted Answer

Marginal Propensity to Consume (MPC) Marginal Propensity to Consume (MPC) is the change in consumption expenditure per unit change in income. It represents the proportion of additional income that a household chooses to spend on consumption. It is denoted by 'c'. Mathematically, it is expressed as:...

Question 2

Q2: 2. What is the difference between ex ante investment and ex post investment?

Accepted Answer

The difference between ex ante investment and ex post investment lies in the distinction between planned and actual outcomes. The terms 'ex ante' and 'ex post' refer to 'planned' and 'actual' values, respectively. Ex Ante Investment:    Meaning: Ex ante investment refers to the planned or intended i...

Question 3

Q3: 3. What do you understand by 'parametric shift of a line'? How does a line shift when its (i) slope decreases, and (ii) its intercept increases?

Accepted Answer

A 'parametric shift of a line' refers to a change in the position or slope of a line on a graph due to a change in one of its underlying parameters. In the context of macroeconomic models, a parameter is a value that is assumed to be constant within the model, such as autonomous consumption (C̄) or...

Question 4

Q4: 4. What is 'effective demand'? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?

Accepted Answer

Effective Demand Effective demand refers to the level of aggregate demand which becomes 'effective' in determining the equilibrium level of national income because it is equal to the aggregate supply. In the Keynesian framework, it is assumed that the aggregate supply is perfectly elastic at a fixed...

Question 5

Q5: 5. Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level...

Accepted Answer

To solve this problem, we first need to calculate the ex-ante aggregate demand (AD) and then compare it with the level of income (Y). Given:    Total Autonomous Expenditure (Ā) = Rs 50 crores    Marginal Propensity to Save (MPS) = 0.2    Level of Income (Y) = Rs 4000 crores Step 1: Calculate the Mar...

Question 6

Q6: 6. Explain 'Paradox of Thrift'.

Accepted Answer

The 'Paradox of Thrift' is a concept in Keynesian economics which states that if everyone in an economy tries to save more, the total savings of the economy may not increase; it might either decrease or remain unchanged. This outcome seems paradoxical because at an individual level, saving more lead...

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