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Important Questions
for Class 12
Economics
Aggregate Demand
and Supply and
Their Components
December 7, 2019 by Bhagya

Income Determination
Important Questions for
class 12 economics
Aggregate Demand and
Supply and Their
Components
1. Aggregate Demand (AD) The sum, total of
the demand for all the goods and services in an
economy during an accounting year is termed as
an Aggregate Demand of an economy. Aggregate
Demand of an economy is measured in terms of
the (expected) Total Expenditure on all products
(goods and services) in an economy during an
accounting year.
Aggregate Demand is directly related with income
level arid inversely related with general price level.

2. Components of Aggregate Demand (for a

four sector economy)
(i) Household consumption demand or
expenditure (C).
(ii) Private investment demand or expenditure (I).
It is affected by:
(a) Rate of interest.
(b) Marginal ePciency of capital.
(iii) Government expenditure or demand for goods
and services (G).
It comprises of:
(a) Intermediate consumption of government
sector.
(b) Compensation of employees of government
sector.
(c) Imports by government sector.
(iv) Net export (X – M).
Thus, Aggregate Demand can, also be written as

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Note
It should be remembered that AD is not zero at
zero level of income.
AD = C +1+ G + X- M

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3. Aggregate Supply (AS) It is the money value
of the Xnal goods and services or national product
produced in an economy during one year. It is
equal to income generated.

4. Components of Aggregate Supply

(i) Consumption expenditure (C)
(ii) Saving (S)
Thus, Aggregate Supply can also be written as AD
=C+S

5. Propensity to Consume It refers to the ratio

between consumption (C) and income (Y). It
shows level of consumption (C) with respect to a
given level of income (Y).

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6. Average Propensity to Consume The ratio
between the consumption expenditure and
income is called Average Propensity to Consume.
Average Propensity to Consume (APC) = C/Y
Where, C = Consumption, Y = Income

7. Marginal Propensity to Consume The ratio

between the change in consumption expenditure
with the change in income is called Marginal
Propensity to Consume.

8. Consumption Function The functional

relationship between the consumption
expenditure and the income is known as
consumption function.
C = f(Y)
Where, C = Consumption expenditure
Y = Income, or in other words, consumption is a
function of income.

9. Algebraic Expression of Consumption

Function The algebraic expression of
consumption function is given by

10. Propensity to Save It refers to the ratio

between savings (S) and income (Y) with respect
to given level of income.

11. Average Propensity to Save The ratio

between total savings and the total income in an
economy at a given level of income is termed as
Average propensity to Save.
Average Propensity to Save (APS) = S/Y
Where, S = Saving
Y= Income

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12. Marginal Propensity to Save The ratio
between the change in savings with the change in
income is known as Marginal Propensity to Save.

13. Saving Function The functional relationship

between saving and income is known as saving
function.
S = f(Y)
Where, S = Saving
Y = Income or we can also say that saving is a
function of income.
Saving is the excess income which is left with the
consumer after paying for all the consumption
expenditure.
S=Y-C
Where, terms have their usual meaning.

14. Algebraic Expression of Saving

Function The algebraic expression of saving
function is given by

15. Relationship between APC and APS

APC + APS =1
or APC = 1 – APS
and APS = 1 – APC

16. Relationship between MPC and MPS

MPC + MPS = 1
or MPC = 1 – MPS
and MPS = 1 – MPC

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17. Investments There are additions made to
the present stock of capital. It leads to an increase
in capital assets.

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18. Autonomous Investment An investment

which is not in^uenced by expected proXtability or
level of income is called autonomous investment.

19. Induced Investment It is positively related

to the level of income in an economy. At higher
levels of income, consumption expenditure tends
to increase, thereby motivating the producers to
increase their investment to be able to meet
Higher Demand levels.

Previous Years Examination

Questions
1 Mark Questions

1. What is excess of exports of goods over

the imports of goods called? (Foreign
2014)
Ans. It is referred to as net exports.

2. DeUne Investment. (Compartment 2014)

Ans. Investments are additions made to the
present stock of capital. It leads to an increase in
capital assets.

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3. Give the meaning of Aggregate Supply.
(Foreign 2014)
or
DeUne Aggregate Supply.
(All India 2009,2008)
Ans. Aggregate Supply is the money value of the
Xnal goods and services or national product
produced in an economy during one year. It is
equal to income generated.

4. DeUne Marginal Propensity to Consume.

(Delhi 2014; All India 2009)
Ans. The ratio between the change in
consumption expenditure with the change in
income is called Marginal Propensity to Consume.
AC
MarginalPropensitytoConsume(MPC)=AY
Where,AC=Changeinconsumptionexpenditure
AY=Changeinincome

5. Give the meaning of Marginal Propensity

to Save. (All India 2010)
or
DeUne Marginal Propensity to Save.
(All India 2009; Delhi 2008C)
Ans. Marginal Propensity to Save is the ratio of
change in saving with the change in income.

6. Give the meaning of Aggregate Demand.

(Delhi 2010,2009c)
or
DeUne Aggregate Demand. (Delhi 2009c)
Ans. The sum, total of the demand for all the
goods and services in an economy during an
accounting year is termed as Aggregate Demand
of the economy. Aggregate Demand of an
economy is measured in terms of the (expected)
Total Expenditure on all products (goods and
services) in the economy during an accounting
year.

7. Give the meaning of autonomous

consumption. (Delhi 2009)
Ans. The initial or minimum level of consumption
done at zero level of income for sustenance is
termed as autonomous consumption.

8. What is propensity to consume? (Delhi

2009c)
Ans. It refers to the ratio between consumption
(C) and income (Y). It shows level of consumption
(C) with respects to a given level of income (Y).

9. What is consumption function? (Delhi

2008)
Ans. The functional relationship between
consumption expenditure and the income is
known as consumption function.
C = f(Y)
Where, C = Consumption expenditure
Y= Income, f = Functional relationship

10. If Marginal Propensity to Save is 3 r

what is the value of Marginal Propensity
to Consume? (All India 2008)
Ans. Here, Marginal Propensity to Save (MPS)
=0.3
Hence, Marginal Propensity to Consume (MPC)
=1- MPS =1- 0.3 =0.7
MPC = 0.7

11. DeUne Average Propensity to Consume.

(All India 2008)
Ans. The ratio between the consumption
expenditure and income is known as Average
Propensity to Consume.
Average Propensity to Consume (APC) = C/Y
Where, C = Consumption expenditure
Y = Income.

12. If the value of Average Propensity to

Save is (-) 0.6, what will be the value
of Average Propensity to Consume? (All
India 2008)
Ans. Here, Average Propensity to Save (APS) (-)
0.6
Hence, Average Propensity to Consume (APC) = 1
– APS =1 – (- 0.6) =1.6
Average Propensity to Save (APC) =1.6

13. If the value of Average Propensity to

Consume is 1.5, what will be the value
of Average Propensity to Save? (Delhi
2008C)
Ans. Here, Average Propensity to Consume (APC)
= 1.5
Now, we know that
Average Propensity to Save (APS) =1- APC
So, Average Propensity to Save (APS) =1- 1.5 = –
0.5

3 Marks Questions

14. Give the meaning of Average Propensity

to Save. What is its relation with Average
Propensity to Consume? (Compartment
2014)
Ans. The ratio between total savings and total
income in an economy at a given level of income
is termed as ‘Average Propensity to Save’.
Symbollically,
Average Propensity to Save (APS) = savings
(S)/Income Y)
Relation of Average Propensity to Save with
Average Propensity to Consume
APC is the ratio of the total consumption to total
income and APS is the ratio of total saving to total
income
As we know that, Y=C+
S
APC is the ratio of the total consumption to total
income and APS is the ratio of total saving to total
income

Average Propensity to Save (APS) can have

negative value, when the amount of consumption
expenditure is more than the income.

15. Find consumption expenditure from the

following
Autonomous Consumption =Rs. 100
Marginal Propensity to Consume =0. 70
National Income = Rs. 1000 (Delhi 2012)

16.
6. Find consumption expenditure from the
following
National Income =Rs. 5000
Autonomous Consumption = Rs. 1000
Marginal Propensity to Consume = 0.8

17. Find National Income from the

following
Autonomous Consumption = Rs. 100
Marginal Propensity to Consume =0.60
Investment = Rs. 200

18. Find investment from the following

National Income = Rs. 600 Autonomous
Consumption = Rs. 150
Marginal Propensity to Consume =0.70

19. Given that National Income is Rs. 80

crore and consumption expenditure is Rs.
64 crore, Und out Average Propensity to
Save. When income rises to Rs. 100 crore
and consumption expenditure to Rs. 78
crore, what will be the Average Propensity
to Consume and Marginal Propensity to
Consume? (Delhi 2011)
Ans. Here, in Xrst condition, Y=
Rs. 80 crore
C = Rs. 64 crore
Hence, S=
Y–C
= 80 – 64 =Rs. 16 crore
Now, Average Propensity to Save (APS) = S/Y
= 16/80 = 0.20
Again, when income and consumption
expenditure rises,
Y = Rs. 100 crore
C= Rs. 78 crore
So, Average Propensity to Consume (APC)
=C/Y=78/100=0.78

20. If National Income is Rs. 50 crore and

saving is Rs. 5 crore, Und out Average
Propensity to Consume. When income rises
to Rs. 60 crore and saving to Rs. 9 crore,
what will be the Average Propensity to
Consume and Marginal Propensity to Save?
(Delhi 2011)
Ans. Here, in Xrst condition,
Y = Rs. 50 crore
S = Rs. 5 crore
Hence, C=Y–S
= (50 – 5) crore
= 45 crore
AverageCLS 6 7
Propensity 8 Consume
to 9 10(APC)
11 = C/Y
12 =
TERM WISE
PHYSICS COURSE MCQ
45/50 =0.90
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