Determination Of Income And Employment — Important Questions

₹200 crores

Step 1: Break-even point is where saving = 0 (i.e., C = Y). Step 2: Set the saving function equal to zero: 0 = –80 + 0.4Y. Step 3: 0.4Y = 80. Step 4: Y = 80 / 0.4 = ₹200 crores. At this income level, all income is consumed and saving is zero. Option A (160) is incorrect – plugging in gives S = –80 + 64 = –16, not zero. Option C and D similarly do not give S = 0 correctly.

AS is perfectly inelastic; output remains fixed at full employment regardless of price level

Step 1: Classical economists believed markets are self-correcting and always at full employment. Step 2: A vertical AS curve means output does not change with changes in price level. Step 3: This is called perfectly inelastic supply – no matter what happens to prices, the economy produces the same full employment level of output. Step 4: Option A is wrong because AS is not positively sloped in the Classical view. Step 5: Option B contradicts Classical theory. Option D describes the Keynesian AS curve (perfectly elastic), not Classical.

₹100 crores

Step 1: Required increase in income = Full employment income – Actual income = 1000 – 600 = ₹400 crores. Step 2: Multiplier K = 1 / MPS = 1 / 0.25 = 4. Step 3: ΔY = K × ΔI, so ΔI = ΔY / K = 400 / 4 = ₹100 crores. Options A and B are too low. Option D (150) would generate ΔY = 4 × 150 = 600, which is too high. The correct additional investment is ₹100 crores.

Ex-ante is planned/desired investment; Ex-post is actual/realised investment, and Ex-post S always equals Ex-post I

Step 1: 'Ex-ante' means 'before the event' – it refers to planned or desired magnitudes. Step 2: 'Ex-post' means 'after the event' – it refers to actual or realised magnitudes. Step 3: Ex-ante S and Ex-ante I may differ – savers and investors are different groups guided by different motives. Step 4: However, Ex-post S always equals Ex-post I by accounting identity (any unplanned change in inventories ensures this). Step 5: Option A reverses the definitions. Option C is wrong because Ex-ante S and I can differ. Option D has no economic basis.