NCERT Solutions for Class 12 Economics Chapter 4: Determination of Income and Employment

MPC, or Marginal Propensity to Consume, is a vital component of the Keynesian theory of macroeconomics, and it is defined as the increase in consumer spending due to an increase in income. It is expressed as ∆C/∆Y, which shows the change in consumption with a change in income.

Where ∆C = Change in consumption

∆Y = Change in Income

MPC and MPS (Marginal propensity to save) are related as follows:

MPC + MPS = 1

or MPS = 1- MPC

or MPC = 1- MPS

For example, if a person gets Rs. 1000 extra as a bonus, and if he spends around Rs. 700 and saves Rs. 300, then his MPC will be 0.7 and MPS will be 300 or (1- 0.7) = 0.3.

 

 

 

Consider the equation of the straight line of form b = ma + ε, where m > 0 is called the slope of the straight line (a) and ε > 0 is the intercept on the vertical ( b) axis. Any increase in a will result in increasing the value of b by a unit of m. Here m and ε are known as parameters of the graph, and their role is to regulate the graph’s position.

Parametric shift refers to the changes in the curve due to changes in the value of the entities m and ε in the graph.

According to the conditions in question

i. If the slope decreases, then the consumption curve will shift downwards

ii. When the intercept increases, the consumption curve will move parallelly with the intercept.

 

Effective demand is the demand for a product or service when purchasers become constrained in a market. It also refers to their ability and willingness to purchase goods at different levels. According to the macroeconomic theory by Keynes, effective demand is referred to as the point of equilibrium where aggregate demand equals aggregate supply.

Graphically it can be represented as :

In this graph, the x-axis represents income, and the y-axis represents the level of aggregate demand. The two curves, AD and AS, meet at equilibrium point E. Effective demand is shown by EG. AD represents the output level. The autonomous expenditure multiplier can be derived as follows

Y = AD (at equilibrium)

AD = A + cY

Therefore

Y = A + cY

or A = Y – cY

A = Y (1 – c)

Y = A / (1 – c)

Where

A = Autonomous expenditure

c = MPC or Marginal Propensity to Consume

Y = Level of income

1 / 1-c = autonomous expenditure multiplier

Therefore we can say that the autonomous expenditure multiplier is dependent on the MPC and Income level.

 

 

Paradox of thrift is said to be a situation where people tend to save more money, and this form of increased saving leads to reduced consumption and as a result, there is a decrease in aggregate consumption. Such a system of savings will lead to a decrease in levels of employment and reduce the total savings of the economy, and slows down the growth of the economy. This is one of the central components of Keynesian economics.