Chapter MCQ Test 2 — Determination of Income and Employment
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
An economy has MPC = 0.8. The government raises investment by ₹50 crore. National income will rise by:
₹250 crore
₹40 crore
₹50 crore
₹10 crore
Explanation: k = 1 ÷ (1 − 0.8) = 5; ΔY = 5 × 50 = ₹250 crore.
Question 2 of 10
Why does an injection of investment raise income by a multiple of itself?
Each round of spending becomes income that is partly re-spent
Money is printed
Prices fall
Saving rises first
Explanation: The spending chain (income → consumption → income …) multiplies the original injection.
Question 3 of 10
If people decide to save a larger fraction of income (MPC falls), the multiplier will:
Become smaller
Become larger
Stay the same
Turn negative
Explanation: A lower MPC means less is re-spent each round, so the multiplier shrinks.
Question 4 of 10
During the Great Depression the economy stayed at a steady but low output with mass unemployment. This is an example of:
Underemployment equilibrium
Full employment
An inflationary gap
A budget surplus
Explanation: Equilibrium below full employment — output steady but jobs scarce — is underemployment equilibrium.
Question 5 of 10
To close a deflationary gap, the correct policy mix is to:
Raise government spending / cut taxes / ease money (raise AD)
Cut spending and raise taxes
Do nothing
Raise the repo rate
Explanation: A deflationary gap needs higher AD, achieved by expansionary fiscal and monetary policy.
Question 6 of 10
When aggregate demand exceeds the economy's full-employment output, the result is mainly:
Rising prices (inflation), not more output
More unemployment
Falling prices
A trade deficit
Explanation: With no spare capacity, extra demand pulls prices up rather than raising real output — an inflationary gap.
Question 7 of 10
At equilibrium income, planned saving equals planned:
Investment
Consumption
Tax
Income
Explanation: AD = AS is equivalent to planned saving = planned investment.
Question 8 of 10
If MPC = 0.6, then MPS and the multiplier are:
0.4 and 2.5
0.6 and 5
0.4 and 4
0.6 and 1.67
Explanation: MPS = 1 − 0.6 = 0.4; k = 1 ÷ 0.4 = 2.5.
Question 9 of 10
Autonomous consumption (a > 0) means that even at zero income, people:
Still consume (by dis-saving or borrowing)
Consume nothing
Only save
Pay only taxes
Explanation: A positive intercept shows minimum consumption financed by past savings or borrowing when income is zero.
Question 10 of 10
The central task of macroeconomic policy, in this model, is to push aggregate demand toward the:
Full-employment level
Zero level
Break-even point only
Maximum possible level always
Explanation: Policy aims to make AD match full-employment output — avoiding both deflationary and inflationary gaps.