RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function

Rajasthan Board RBSE Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function

RBSE Class 12 Economics Chapter 20 Practice Questions

RBSE Class 12 Economics Chapter 20 Multiple Choice Questions

Question 1.
What is Formula of the Marginal Propensity to Consume ?
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 1
Answer:
(c)

Question 2.
Maximum value of MPC will be :
(a) Zero
(b) 1
(c) ∞
(d) None of these.
Answer:
(b)

Question 3.
If APC = APS, then what will be the independent value of APC and APS respectively ?
(a) Zero
(b) 1
(c) 0.5
(d) 0.7
Answer:
(c)

Question 4.
The value of MPC plus MPS is equal to :
(a) Zero
(b) Infinite
(c) None of these
(d) 1
Answer:
(d)

RBSE Class 12 Economics Chapter 20 Very Short Answer Type Questions

Question 1.
What do you understand by the Marginal Propensity to Consume ?
Answer:
The ratio of change in consumption to the change in income is termed as Marginal Propensity to Consume.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 2

Question 2.
What is consumption function ?
Answer:
Functional relation between Income and Consumption is called consumption function.

Question 3.
If MPC = 0.5, then what will be the value of MPS ?
Answer:
MPS = 1 – MPC
Given (MPC = 0.5)
MPS = 1 – 0.5
MPS = 0.5

Question 4.
What is an investment function ?
Answer:
Investment function refers to the acquiring of new productive assets and using them for the production of goods and services.

Question 5.
What is Average Propensity to Save ?
Answer:
The ratio between total savings and total income is called an Average Propensity to consume.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions

Question 1.
What do you understand by Average Propensity to Consume ? How is it measured ?
Answer:
It is a proportion of consumption to a specific level of income an economy. The income completely consumed by people of society in an economy is called average propensity to consume. In other words, Average Propensity to consume is that part of the total income, which can be spent on consumption.

It can be measured by dividing total consumption by the total income.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 3

Question 2.
What do you mean by investment ?
Answer:
Investment means acquiring new productive assets and using them in the production of goods and services. But, when goods and services are not produced from this, then it is called capital formation. When new goods and services are produced from these assets, capital formation turns into investment.

Question 3.
Differentiate between Autonomous investment and Induced investment.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 4

Question 4.
What do you understand by Marginal Propensity to Save and Marginal Propensity to Consume ?
Answer:
Marginal Propensity to Save : When change in savings reflect the increase in savings due to the increase in income.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 5

Marginal Propensity to Consume : Change in consumption is affected by the change in income, therefore, when income increases, consumption also increases. Similarly, when income decreases, consumption power decreases simultaneously. Therefore, the ratio between change in income and change in consumption is called Marginal propensity to consume.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 6

RBSE Class 12 Economics Chapter 20 Essay Type Questions

Question 1.
Explain saving function with the help of a table, figure and a mathematical formula.
Answer:
Total consumption is deducted from total income to obtain savings,
∵ Y = C + S
S = Y – C
To obtain savings function, consumption is deducted from various income levels on a 45° equilibrium line.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 7

Mathematical Formula:
Y = C + S ….(1)
C = a + b. y ….(2)
By putting the value of (2) in (1)
Y = a + b. y + S
– a + (1 – b) y = S
S = -a + (1 – b) y
This is the mathematical formula for savings function.

Question 2.
Explain in detail, the marginal efficiency of capital.
Answer:
Marginal efficiency of capital is that rate of discount which makes equal supply price of capital (or cost of project) to an expected return of project. According to Prof. Kurihara, “Marginal efficiency of capital is the ratio between the income of additional capital goods and their supply price.”

Marginal efficiency of capital is an expected rate of return on an additional unit of capital goods over its cost. It is determined by two factors :
(i) Expected returns, and .
(ii) Supply price of capital (cost of project).
Expected returns means how much profit can be obtained from this capital project in the. future. In this way, Supply price of capital is the cost of capital project.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 8
Here, C = Cost of project
r = Discount rate
R1, R2 ……….. Rn = Propective yield from first, second and upto n years.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 9
In the above figure, MEC is a curve, investment ₹ is dentoed along the X-axis, and on Y- axis, MEC has been taken. When investment increases from OI1 to OI2, then marginal efficiency of capital decreases upto the level of OP1 to OP2. It means MEC decreases with the increase in investment. The following two reasons are responsible for this phenomenon :

1. With more production, demand for capital increases and quantum of expected yield decreases. This is because of the fact that prices of produced output decreases.
2. Demand for capital increases which increases its supply price, i.e., increase in cost of production. Therefore, as investment increases, MEC curve slopes downwards towards the right.

Question 3.
Explain consumption function with the help of a table, figure and a mathematical formula.
Answer:
A person, whatever he receives as his total income, consumes one part of his income and saves the other part for his future needs. According to Prof. Keynes, consumption is mainly affected by income of consumers, so the part of income spent on consumption is called consumption propensity or consumption function. Consumption increases with the increase in income and vice-versa. But consumption cannot be zero even when the income becomes zero because it is fulfilled either from savings or through loans (borrowings). Here, consumption does not mean only the desire to consume, but it also includes the consumed quantity. There is a direct relation between income and consumption. Thus, it is said that the consumption is the function of income.

Formula :
C = f(yd)
Here, C = Consumption
f = Function of
yd = Disposable income
If consumption function is a linear straight line, then :
C = a + b (yd)
Here, a = Autonomous consumption
b = Marginal Propensity to Consume
Consumption function with the help of Graph :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 10

RBSE Class 12 Economics Chapter 20 Other Important Questions – Answers

RBSE Class 12 Economics Chapter 20 Multiple – Choice Questions

Question 1.
Which of the following statements is true ?
(a) MPC + MPS = 0
(b) MPC + MPS < 1
(c) MPC + MPS = 1
(d) None of these
Answer:
(c)

Question 2.
MPC + MPS = ?
(a) Infinite
(b) 2
(c) 1
(d) Zero
Answer:
(c)

Question 3.
Who wrote the book – “The General Theory of Employment, Interest and Money”?
(a) Marshall
(b) Pigou
(c) Keynes
(d) Sameulson
Answer:
(c)

Question 4.
When did financial crises appear in America, Great Britain and other countries:
(a) 1929-33
(b) 1928-33
(c) 1929-34
(d) 1930-33
Answer:
(a)

Question 5.
When did Keynes write his book ?
(a) 1936
(b) 1940
(c) 1938
(d) 1945
Answer:
(a)

Question 6.
What does ‘a’ mean in C = a + b Yd
(a) Autonomous Consumption
(b) Marginal Propensity to consume
(c) Disposable Income
(d) None of these
Answer:
(a)

Question 7.
Value of MPC is :
(a) More than zero
(b) More than one
(c) Between zero and one
(d) None of these
Answer:
(c)

Question 8.
MPC will be minimum at :
(a) 0
(b) 1
(c) 0.5
(d) 0.7
Answer:
(a)

Question 9.
Sum of APS and APC equals to :
(a) zero
(b) one
(c) infinite
(d) none of these
Answer:
(b)

Question 10.
Investment made by the government is called as :
(a) Automomous investment
(b) Private investment
(c) Public investment
(d) None of these
Answer:
(c)

RBSE Class 12 Economics Chapter 20 Very Short Answer Type Questions

Question 1.
What was the assumption of Classical Economists ?
Answer:
They assumed that total employment is found in an economy.

Question 2.
In which book did Keynes criticize the classical theory of employment ?
Answer:
A book named “The General Theory of Employment, Interest and Money”.

Question 3.
What kind of theory of Keynes is income and employment theory ?
Answer:
Short-term theory.

Question 4.
Whose functions are saving and consumption ?
Answer:
Savings and consumption are the functions of income.

Question 5.
What is mesunt by Propensity to Consume ?
Answer:
Actually consumed quantity; not only the desire to consume.

Question 6.
What is marginal propensity to consume ?
Answer:
The ratio between proportion of change in consumption and proportion in change in income.

Question 7.
Write the formula for Marginal Propensity to Consume.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 11

Question 8.
What is saving ?
Answer:
The remaining part of total income left after consumption.

Question 9.
What kind of correlation is found between income and consumption ?
Answer:
Positive.

Question 10.
Write the formula for Average Propensity to Save.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 12

Question 11.
Write the formula for Marginal Propensity to Save (MPS).
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 13

Question 12.
What is meant by average propensity to consume ?
Answer:
Average propensity to consume is that part of income which is spent on total consumption.

Question 13.
Write the formula for Average Propensity to Consume.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 14

Question 14.
Define investment.
Answer:
Expenditure made for production in an economy in one year is known as investment.

Question 15.
Why MPC does not exceed its value from 1 ?
Answer:
Because the sum of MPC and MPS is 1.

Question 16.
What will be the value of MPC, when MPS = 0 ?
Answer:
MPC = 1 – MPS
= 1 – 0
MPC = 1.

Question 17.
If MPS = 0.4, what will be the value of MPC ?
Answer:
MPC = 1 – MPS
= 1 – 0.4
MPC = 0.6

Question 18.
How is the analysis of Employment theory of Keynes, in context of time ?
Answer:
This theory is a short-term analysis.

Question 19.
According to Keynes, how is income determined in the society ?
Answer:
Income in the society is determined through consumption and investment.

Question 20.
Write two elements influencing investment motivation.
Answer:

  1. Marginal Efficiency of Capital (MEC).
  2. Rate of Interest.

Question 21.
What is meant by public investment ?
Answer:
Money invested by the government to develop the basic infrastructure is called public investment.

Question 22.
Write three examples of public investment.
Answer:
Investment made by government in the construction of roads, bridges, dams, etc.

Question 23.
What is private investment ?
Answer:
When individuals invest their money in new factories, buildings or equipments, it is called private investment.

Question 24.
How many aspects do Savings and Investment have ?
Answer:
Two.

Question 25.
What are the two aspects of Savings and Investment ?
Answer:
Ex-ante saving and ex-ante investment.

Question 26.
What are ex-post savings ?
Answer:
It is the actual saving from family unit income.

Question 27.
What are ex-post investments ?
Answer:
It is the actual investment made by an investor (enterpreneur) in one year.

Question 28.
Which factors affect the Marginal Efficiency of Capital ?
Answer:
Price of supply (cost of project), and prospective income.

Question 29.
What is meant by price of supply ?
Answer:
Money spent on capital goods is called price of supply.

Question 30
Till when is investment made ?
Answer:
Till marginal efficiency of capital exceeds rate of interest, until then the investment would be made continuously.

Question 31.
Marginal efficiency of capital is compared to what for taking investment related decisions ?
Answer:
It is compared with the rate of Interest.

Question 32.
Where does the equilibriun of investment lie ?
Answer:
Where Marginal Efficiency of Capital equals the Rate of Interest.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions (SA-I)

Question 1.
What is meant by total employment ?
Answer:
When all the people who agree to work on the prevailing wage rate and get employment, it is called the state of total employment.

Question 2.
What is the relation between Income, Consumption and Saving ?
Answer:
Both consumption and savings increase with the rise in income, but rate of increase for savings is more than the rate of consumption.

Question 3.
Write any two features of marginal propensity to consume.
Answer:

  1. MPC is always positive.
  2. MPC is more than zero but not more than one.

Question 4.
Write two features of consumption propensity.
Answer:

  1. Consumption propensity means the actual expenditure of money.
  2. Consumption cannot be zero even when the income is zero.

Question 5.
How does income affect savings ?
Answer:
Income and savings have a positive relationship. When income increases, savings also increase, and when income decreases, savings also decrease.

Question 6.
According to Keynes, level of income and employment depends upon which factor ?
Answer:
According to Keynes, level of income and employment depends upon the effective demand of a country during a certain time period.

Question 7.
According to Keynes how can the target of absolute employment be achieved ?
Answer:
According to Keynes, by increasing the effective demand, unemployment can be reduced and level of absolute employment can be achieved.

Question 8.
Write about Keyne’s psychological law.
Answer:
According to Keynes, consumption of a consumer increases when his income increases, but it does not increase more than the increase in level of income.

Question 9.
Explain the relationship between MPS and MPC with the help of equations.
Answer:
Sum of MPC and MPC equals to 1. It can be clarified mathematically as follows :
Sum of MPC and MPS = 1
MPC + MPS = 1
MPC = 1 – MPS
MPS = 1 – MPC

Question 10.
What is the effect of income rise on APC and MPC ?
Answer:
When income rises, both APC and MPC decrease, but MPC decreases more than APC.

Question 11.
Explain the importance of investment in Keynes’ employment principle.
Answer:
The level of employment is affected by the change in investment. Higher level of employment can be achieved by higher investment.

Question 12.
What do you mean by real investment ?
Answer:
Real or actual investment is the investment under which new assets and capital goods increase and building of new factories and machines take place.

Question 13.
What an induced investment ?
Answer:
Amount invested to earn profit or interest is called as induced investment.

Question 14.
What is the effect of Interest Rate on Investment ?
Answer:
Investment is promoted when Interest Rate decreases and investment is de-motivated when interest rate is high.

Question 15.
What is intended saving ?
Answer:
In any economy, whatever part of amount a person wants to save from his income is called intended saving.

Question 16.
What do you mean by actual saving ?
Answer:
In any economy, on a special income level, the amount remaining from income after consumption, is called actual saving.

Question 17.
What factors affect the induced investment. Explain.
Answer:
In any economy, an induced investment is affected by level of income, changes in income, consumption tendency, change in consumption stocks, etc.

Question 18.
What is autonomous investment ?
Answer:
It is that investment which increases the new assets and quantity of capital goods.

Question 19.
What is interest ? What is its effect on investment ?
Answer:
Interest is the return on an invested capital. On lower rates of interest, investment is motivated, and vice-versa.

Question 20.
What is the nature of marginal efficiency of capital ?
Answer:
It is inverse to the capital investment. With every rise in investment, MEC decreases.

Question 21.
Write the numerical formula for marginal efficiency of capital.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 15

Question 22.
Write two reasons why the marginal efficiency of capital reduces with rise in investment.
Answer:

  1. The expected future income reduces with the rise in supply of capital stock
  2. Cost of production of machines increases due to the application of law of productivity.

RBSE Class 12 Economics Chapter 20 Short Answer Type Questions (SA-II)

Question 1.
What is the meaning of consumption function or consumption propensity ?
Answer:
According to Prof. Keynes, the part of income spent on consumption, is called consumption function. The rate of consumption depends upon the income of the people. When there is a rise in income, consumption also increases and vice versa, but consumption cannot be zero, even when the income is zero.
Formula : C = f (yd)
were, C = Consumption
f = consumption function
yd = Disposable income

Question 2.
Explain Average Propensity to Consume.
Answer:
In an economy, the part of income consumed by the whole society is called Average Propensity to Consume. It is that part of income which is spent of consumption.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 16

Question 3.
Explain the concept of Marginal Propensity to consume.
Answer:
MPC – The change in income also affects the change in consumption, therefore, when income increases, consumption also increases, and when income decreases level of consumption also decreases. Therefore, the ratio between the change in consumption and change in income is called Marginal Propensity to consume.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 17

Question 4.
Explain the concept of propensity of saving.
Answer:
The remaining income, left from the total income, after consumption, is called saving. The relationship between income and saving is called saving function. Saving is dependent upon income, because saving increases when income increases and it decreases as income decreases. But the level of rise in saving is generally more than the level of rise in income.

Question 5.
What do you mean by average propensity to save and marginal propensity to save ?
Answer:
Saving is of two kinds :
(i) Average Propensity to save – Ratio of savings and income is called Average Propensity to Save.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 18
APS is generally less than 1 but it can be negative if consumption exceeds income.
(ii) Marginal Propensity to save – It is the ratio of change in savings to the change in income.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 19

Question 6.
Describe the importance of consumption propensity in economic analysis.
Answer:

  1. It helps in better understanding of the business cycles.
  2. High consumption propensity leads to the maintenance of high level of employment.
  3. High consumption propensity maintains economic stability.

Question 7.
Write the features of consumption function.
Answer:

  1. Consumption propensity remains constant in the short term.
  2. It can never be zero even if the income becomes zero because it is fulfilled through the past savings.
  3. It denotes the actual amount of money spent on consumption.

Question 8.
Explain Anticipated Saving.
Answer:
In an economy, whatever amount we plan to save, it is known as anticipated saving. It is that saving which can be assumed in advance. Therefore, it is not compulsory that it is equal to the actual saving.

Question 9.
What- meant by anticipated Investment ?
Answer:
In an economy, whatever amount we plan to invest, is known as anticipated Investment. It is that investment, which has the possibility to be made in the future.

Question 10.
What is meant by actual investment ?
Answer:
In an economy, whatever rise actually happens in a capital market- meaning whatever investment is actually made is called actual investment. Actual Investment is neither less or more than the actual savings, these two are always equal.

Question 11.
What is meant by actual savings ?
Answer:
The remaining income left from the total income after consumption is called acutal saving. This can also be called actual investment. Hence, it is that saving which is actually made.

Question 12.
What is Investment ?
Answer:
Investment is that expenditure due to which there is an increase in capital goods like- Machines, factory, house, furniture, etc. Investment includes the necessary machines and equipment for production, as well as the increase in new construction, and increase in stock.

Question 13.
What is the relation between rate of interest and investment ?
Answer:
Investment cannot be imagined without capital stock. Investment refers to the capital invested to complete a project, while interest is the cost of capital.

Question 14.
What do you mean by Marginal efficiency of capital?
Answer:
To increase the rate of employment and fulfilling the increasing needs, investment is compulsory in any economy. The profit earned from an additional unit of capital is called Marginal efficiency of capital.

Question 15.
What are the factors affecting investment in an economy ? Explain.
Answer:

  1. Marginal efficiency of capital : Demand of investment is low on high rate of interest and vice-versa. Thus, the MEC curve has a negative slope.
  2. Rate of Interest : When the rate of interest is high, it increases the cost of capital, and thus, investment declines.

Question 16.
Explain marginal efficiency of capital with MEC curve.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 20

Question 17.
Explain graphically the consumption function.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 21

Question 18.
What do you mean by anticipated and anticipated Investment ?
Answer:
Anticipated Saving – Savings done especially in an year is called anticipated savings.
Anticipated Investment – When businessmen expect to increase their sales or expect an increase in the rate of their services, they tend to increase their stock, it is called an anticipated Investment.

Question 19.
State the reasons for reduction of capital Marginal Productivity with rise in investment.
Answer:
There are two reasons for the same –

  1. Due to the more production, the consumption of capital increases, likewise, the level of anticipated profit keeps decreasing, because more production results in the decreased price of produced goods.
  2. When the demand of capital increases, its supply price is increased, and hence the price of production also increases.

Question 20.
Explain the investment decision taken by an invester.
Answer:
An investor, while taking the investment-related decisions, compares the rate of interest and marginal efficiency of capital. He keeps investing till the marginal efficiency of capital is more than to the rate of interest.

RBSE Class 12 Economics Chapter 20 Essay Type Questions

Question 1.
Write the main features of Keynesian employment theory.
Answer:
Classsical economists were unable to solve the problem of great worldwide economic depression (1929-33). They were forced to re-think on their principles and policies. In the book, “General Theory of Employment, Interest and Money”, Prof. Keynes proved that the classical principles were based on wrong fundamental concepts. He not only criticised the classical principles, but also provided solutions and reasons of unemployment.

Explanation of Keynesian Employment Thory :

  1. Employment depends to effective demand.
    Effective Demand = Total Production = Total Income = Total Employment.
  2. Effective demand is determined by the Aggregate Demand Function (ADF) and Aggregate Supply Function (ASF).
  3. Mainly, Aggregate Demand Function affects effective demand because Aggregate Supply Function remains constant in the short-run.
  4. Aggregate demand function is determined by total expenditure. Total expenditure depends on 3 points : (i) Consumption Expenditure (ii) Investment Expenditure (iii) Government expenditure.
  5. Consumption expenditure depends upon : (i) Size of income (ii) Consumption function. Consumption function or propensity is of two types : (i) Marginal Propensity to Consume (MPC) (ii) Average Propensity to Consume (APC). MPC remains constant in short run.
  6. Investment expenditure depends upon : (i) Marginal Efficiency of Capital (JMEC) (ii) Rate of Interest (r).
  7. MEC is based on : (i) Supply price of capital assets, (ii) Expected income of capital assets. MEC reduces as the investment increases.
  8. Rate of interest is affected through : (i) Liquidity preference and (ii) Supply of money. Supply of money remains constant in short run.
  9. Liquidity preference has three objectives : (i) Exchange objective (ii) Awareness objective (iii) Speculation objective.
  10. Exchange objective and Awareness objective are dependent upon income (Y) and speculation objective depends upon rate of interest (r).

Keynes believed that consumption and investment should be increased in order to increase employment.

Question 2.
What do you mean by consumption propensity ? Also explain marginal and average propensity to consume.
Answer:
A person spends a part of his total income on consumption and he saves another part for his future needs. According to Keynes, the part of income which is spent on consumption is called consumption function. Therefore, the rate of consumption is dependent upon the income. When the income rises, the consumption also increases, and when the income falls, the consumption decreases. But consumption never becomes zero even when the income becomes zero because it is fulfilled by borrowings or by savings. Here, consumption propensity does not include merely the desire to consume but it implies the actual quantity of consumption. Income and consumption have a direct relation. Thus, it is said that consumption is a function of income.
Formula : C = f (Y)
C = Consumption
f = function of
Y = Income

Consumption Propensity has two types :
1. Average Propensity to Consume : In an economy, the part of income consumed by whole society is called Average Propensity to Consume. It is that part of the income on which consumption expenditure is made.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 22

2. Marginal Propensity to Consume : When there is a change in income, consumption also changes. Similarly, when income rises the consumption also rises, and when income falls, consumption also falls. In this way, the ratio of change in consumption to change in income is called marginal propensity to consume.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 23

Features of MPC :
1. It is always positive.
2. It is more than 0 but less than 1.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 24
3. MFC declines when income increases because consumption expenditure increases at a declining rate and saving propensity keeps increasing.

Relation between Average and marginal propensity to consume :

  1. When MPC is constant, APC is also constant.
  2. MPC falls with the rise in income, but it falls more than APC.
  3. When income falls, MPC increases, but it increases more than APC.

RBSE Class 12 Economics Chapter 20 Numerical Questions

Question 1.
If average consumption propensity (APC) is 0.2, 0.4, 0.7, then find average savings propensity (APS).
Answer:
APS = 1 – APC
(i) APS = 1 – 0.2 = 0.8
(ii) APS = 1 – 0.4 = 0.6
(iii) APS = 1 – 0.7 = 0.3

Question 2.
In a balanced economy, find the autonomous consumption expenditure from the following data :
National Income = 500
MPS = 0.30
Investment Expenditure = 100
Answer:
MPC = 1 – MPS = 1 – 0.30 = 0.70
We know that y = C + I
500 = C + 100
500 – 100 = C
C = 400.

Question 3.
Find the investment expenditure from the following data if the economy is in equilibrium :
National Income = ₹ 1000
MPS = 0.20
Autonomous Consumption Expenditure = ₹ 100
Answer:
C = C + 6Y
C = 100 + 0.8 × 1000
C = 100 + 800 = 900
Y = C + I
1000 = 900 + 1
I = 1000 – 900 = 100

Question 4.
Find the MPC in a balanced economy from the following data :
National Income = ₹ 2000
Autonomous consumption expenditure = ₹ 200
Investment expenditure = ₹ 100
Answer:
MPC = Y = C + I
2000 = 200 + 6 × 2000 + 100
2000 – 300 = 2000 b
2000 b = 1700
b = \(\frac { 1700 }{ 2000 } \)
= 0.85

Question 5.
Find MPC from the following data if economy is in a balance mode :
National Income = ₹ 1500
Autonomous consumption Expenditure = ₹ 300
Investment Expenditure = ₹ 300
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 25

Question 6.
Find autonomous consumption expenditure from the given data, if economy is in equilibrium :
National Income = ₹ 1200
MPS = 0.20
Investment Expenditure = ₹ 100
Answer:
Income = consumption + Investment Y = C + I
1200 = C + 0.8 × 1200 + 100
1200 = 960 + 100 + C
C = 1200 – 1060
C = 140.

Question 7.
Find MPC from the following :
(i) Balanced income = ₹ 350
(ii) Consumption expenditure on zero income level = ₹ 20
(iii) Investment expenditure = ₹ 50
Ans.
MPC = ?
Y = C + Iy = i + by + I
350 = 20 + b × 350 + 50
350 = 350b + 70
350 – 70 = 350 b
350 b = 280
b = \(\frac { 280 }{ 350 } \) = 0.8

Question 8.
If average saving propensity (APS) = 0.4, 0.6, 0.9, find average consumption propensity (APC).
Answer:
APC = 1 – APS
(i) APC = 1 – 0.4 = 0.6
(ii) APC = 1 – 0.6 = 0.4
(iii) APC = 1 – 0.9 = 0.1

Question 9.
If marginal propensity of consumption (MPC) is 0.45, 0.65, 0.75, find marginal propensity of savings (MPS).
Answer:
Numerically, MPS = 1 – MPC
(i) MPS = 1 – 0.45 = 0.55
(ii) MPS = 1-0.65 = 0.35
(iii) MPS = 1 – 0.72 = 0.28

Question 10.
If autonomous income is ₹ 500 and consumption income is ₹ 300, then find APC and APS.
Answer:
Given, Income (Y) = 500, Consumption (C) = 300
Saving = 500 – 300 = 200
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 26

Question 11.
If autonomous income is ₹ 10,000, savings is ₹ 3,000, then find APC and APS.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 27

Question 12.
Calculate MPC and MPS from the following table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 28
Answer:
AC = 300, ∆ Y = 500

RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 29

Question 13.
Find MPC from the given table.
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 30
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 31 RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 32

Question 14.
Complete the following table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 33
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 34

Question 15.
Complete the following table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 35
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 36

Question 16.
Complete the following table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 37
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 38

Question 17.
Complete the given table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 39
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 40

Question 18.
Complete the given table :
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 41
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 42

Question 19.
The following consumption function is given in an economy :
C = 100 + 0.5 Y
With a mathematical example, explain that when the income in economy will increase, APC will decrease.
Answer:
Given : C = 100 + 0.5 Y
Here, Y = 0, C = 100
C = 100 + 0.5 (₹ 100) = 100 + 500 = 600
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 43

Question 20.
The income created in an economy is double the autonomous investment. Find out the value of MPS and MPC.
Answer:
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 44
Let the increase in investment = ₹ 100
Rise in income = ₹ 100 × 2 = 200
RBSE Solutions for Class 12 Economics Chapter 20 Concept of Consumption Functions, Savings Function and Investment Function 45

RBSE Solutions for Class 12 Economics