NCERT Class 12 Economics-II Class 12 Chapter 4 Questions And Answers Determination Of Income And Employment

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NCERT Class 12 Economics-II Class 12 Chapter 4 Questions And AnswersEconomics-II Class 12th Chapter 4 Notes | Economics-II Class 12 Chapter 4 Questions And Answers In Hindi Easy PDF, Determination Of Income And Employment


Determination Of Income And Employment


Household Consumption Expenditure – It is the amount spent by the people for the direct fulfilment of their needs.is spent on the purchase of goods and services, it is denoted by C. It depends on the income level. In other words: C=y (g) Aggregate Demand Schedule It is a table which shows the different quantities of demand at different levels of income.

Aggregate Supply – It refers to the total production of goods and services available in the economy. It is similar to national product or national income. It has two components: (i)AS = C+S in the equation to save and (ii) Consumption ● Marginal Propensity to Consume- Change in consumption due to change in income is called marginal consumption.

AY It is usually less than one and greater than zero. Average propensity to save – The ratio between savings and total income is called average propensity to save.

Full employment refers to a state of the economy in which every physically and mentally able person who is ready to work at the prevailing rate of wages has got work. Investment multiplier – The ratio of increase in national income as a result of an increase in investment is called investment multiplier. as a formula

Change in Income (AY) Investment Multiplier (K) = Change in Investment (AN)In short, the investment multiplier refers to the ratio of change in investment to change in income.

is from Characteristics of the multiplier- (i) Aggregate demand has a multiplier effect, (ii) Multiplier operates in both directions- (a) backward and (b) forward (iii) MPS and multiplier



Inverse relation (iv) Direct relation between MPC and multiplier. The propensity to save or the function of saving shows the relationship between income and savings.

Marginal propensity to save: Marginal propensity to save is the ratio of change in saving due to change in income.


NCERT Class 12 Economics-II Class 12 Chapter 4 Questions And Answers


Class12th 
Chapter NameDetermination Of Income And Employment
Chapter numberChapter 4
Part B
BoardCBSE
Book NCERT
SubjectEconomics
Medium English
Study MaterialsQuestion Answers & Notes
Download PDFNcert class 12 economics-II chapter 4 pdf
Determination Of Income And Employment

VERY SHORT ANSWER TYPE QUESTIONS


1. What is meant by investment motivation?

Ans. Investment Motivation – The motivation to increase investment is called investment motivation. It depends on what rate of return the entrepreneurs expect to get on investment compared to the rate of interest. While investing, the investor must keep in mind that how much profit he will get on the investment in future.

2. What is the investment demand function?

Ans. In relation to investment demand and interest rate, investment demand is called a function. There is a negative (-) relationship between interest rates and investment demand. In other words, if the rate of interest is high, investment demand remains low.

3. State the meaning of full employment equilibrium.

Ans. When the balance of Aggregate Demand (AD) and Aggregate Supply (AS) is at that point that all the factors get employed. Aggregate demand is needed for full employment. If aggregate demand is the same, then it is called full employment equilibrium.

4. What is meant by saving function. 

Ans. Savings Function- Savings function means the relation between savings and income. With the increase in national income, savings also increase.

5, What do you understand by overall fulfillment?

Ans. Aggregate supply refers to the aggregate value of the total goods and services produced in an economy over a period of one year. Aggregate Supply = Consumption + Saving AS = C+S

6. When does the situation of deficient demand arise in the economy?

Ans. The situation of deficient demand in the economy arises when aggregate supply exceeds demand at full employment point.

7. What do you understand by propensity to save?

Ans. Functional relationship between different levels of income and different amounts of savings

The schedule showing this is called propensity to save. [S=F(Y)]

8. When is the equilibrium level of full employment income achieved in a country?

Ans. When aggregate demand is equal to aggregate demand and supply at full employment level required to achieve full employment level. _AS = AQ

9. Who told the formula to bring the economy to full employment level by treating incomplete employment level and what is that formula?

Ans. By treating the underemployment level, the economy reaches the full employment level.The formula was given by Keynes. Full employment can be achieved by increasing aggregate demand.

10. Write the meaning of Demand Management Policy.

Ans. Instead of aggregate supply, the government’s attempt to change aggregate demand from incomplete employment level to full-employment level is called demand management policy.

11. What do you understand by consumption function?

Ans. Propensity to consume the functional relationship between consumption and disposable incomeis called consumption function.

Here C=F(0),

C = consumption,

F = Function, y = I

12. Write the meaning of autonomous consumption. 

Ans, the minimum consumption necessary for survival is called autonomous investment.Autonomous investment occurs even at zero level of income. Autonomous investment is always positiveIt happens .

13. Write the meaning of balance.

Ans. Equilibrium is that state of the economy in which aggregate demand and aggregate supply become equal at a normal price. The level of employment at equilibrium level is called equilibrium employment.

14. C = C’ + cY is the equation for aggregate consumption in an economy. Write the constant term in this equation.

Ans. C’ is a constant item called discharge consumption (minimum consumption). this availThe level is also found at zero income level in the economy.

15. C me (Y – 0) = CY, where stands for marginal propensity to consume Eq.Explain the meaning of

Ans. This equation means that if the income in a particular year is zero, then

The use of economy will be zero, meaning the economy will be hungry all year round.

16. What happens to national income when planned saving is less than planned investment?it occurs?

Ans. Income will decrease.

17. How is equality brought about in savings and investment?

Ans. By changing the level of income.

18. Given the MPC, what is the formula to find the Investment Multiplier (K)?

Ans. K=- 1 1-MPC

19. What is the effect of national income on investment?

Ans. It has a multiplier effect.

20. What is meant by expected savings?

Ans. This is the amount that people plan to save.

21. What do you mean by ‘negative savings’?

Ans. It means that consumption is more than income and consumption is met either from past loans or by borrowing.


short answer type questions


1. Distinguish between full employment equilibrium and imperfect employment equilibrium.

Ans. Full Employment Equilibrium If an economy is using the full potential of all its resources, then it is called a state of full employment equilibrium. According to classical theory, there is always full employment equilibrium in the economy. In this situation, the overall demand and supply are equal. Aggregate supply is always equal to output at full employment level.

Imperfect Employment Equilibrium If an economy is not using the full potential of all its resources in the equilibrium state of aggregate demand and supply, then it is called incomplete employment. Keynes had propounded the theory of income and employment on the basis of incomplete-employment equilibrium.

2. What does resistive unemployment represent?

Ans. Resistance unemployment refers to a situation in which some people leave one job for some reason and search for another. It may take time to get a new job.

Therefore, at a particular point of time some people in the economy may be found unemployed. Hence restrictive unemployment is of temporary nature. The government does not need to make a separate effort to solve this. Unlike permanent unemployment, it is not a serious problem for the economy.

3. The flexibility of the wage rate keeps the labor market in equilibrium. Explain.

Ans. Due to the flexibility of the wage rate, the demand and supply of labor remains in equilibrium. If the demand for labor exceeds the supply of labor, then the wage rate of labor increases. If the demand for labor decreases at a higher wage rate, then the supply of labor increases.

The wage rate of labor continues to rise until again the demand and supply of labor are equal. On the contrary, if the demand for labor is less than the supply of labour, then the prevailing market wage rate decreases. Lower wage rate re-establishes balance in demand and supply of labour.

4. Explain the meaning of real wages.

Ans. The total amount of utility that workers can get in return for their physical and mental services is called real wages. In other words, the ability of the worker to buy goods and services from his own income is called real wage. Real wages are determined by the money wage of the worker and the price level.

There is a direct relationship between real wages and money wages, that is, higher money wage rates are likely to result in higher real wages. There is an inverse relationship between real wages and the price level. When the price level is high, the purchasing power of money decreases. That is, the ability to buy goods and services decreases.

5, Whatever may be the price level, output must be at the full employment level. Justify this statement of the prestige principle.

Ans. J. B. The combination of market law and wage-price elasticity of labor creates an automatic market equilibrium. In other words, a state of equilibrium is always maintained in the labor market and the commodity market through flexible wages and prices.

Temporary equilibrium is fixed by wage and price elasticity. The economy always produces at full employment level. Does it Therefore, the classical aggregate supply curve is vertical at the full employment level of output. Price changes have no effect on it. In short, regardless of the price levelIn any case, output remains at full employment level.

6. Define marginal propensity to save.

Ans. Marginal propensity to save is the rate of change in saving due to change in income.

marginal propensity to consumechange in consumption change in incomeMPC = AC AY

MPS = Marginal Propensity to Save, AC = Change in Saving, AY = Change in National Income

7. What two points should be kept in mind regarding the consumption function?

Ans. The following two points should be kept in mind about the consumption function:

(i) The level of consumption depends on the level of personal disposable income. Personal disposable income is received from personal income on payment of direct taxes, penalties and social security expenses. There is a direct relationship between consumption and personal disposable income. Higher level of personal disposable income leads to higher consumption.

(ii) When the level of income is zero, people use old savings for consumption. As long as income is less than consumption, only old savings are used for consumption. This consumption is called minimum consumption necessary for survival.

8. How are the limits of marginal propensity to consume determined?

Ans. The minimum and maximum limits of marginal propensity to consume are determined with the help of the fundamental and psychological law of consumption. On the basis of this rule consumption is not zero even at zero level of national income i.e. propensity to consume is also not zero. In other words, marginal propensity to consume remains greater than zero.

Consumption increases with increase in income, but the rate of increase in consumption is less than the rate of increase in income, that is, marginal propensity to consume remains less than unity. By combining these two limits, we can say that the marginal propensity to consume curve lies between 0 and 1.

9. What is 45° line? what is it used for ?

Ans. A line drawn at an angle of 45° from the center of the axis is called a 45° line. The same scale of measurement is taken on both the axes. Therefore, the horizontal and vertical differences (national income and consumption expenditure) remain equal at each point of the 45° line. With the help of this line, national income and consumption can be compared.

If the consumption curve is above 45°, then consumption expenditure exceeds income. When the consumption curve cuts the 45° line, then both the income and expenditure are equal and if the 45° line lies above the consumption, the consumption expenditure is less than the income.

14. If sponsored savings are less than sponsored investment in the economy, then state its effect on national income, employment and prices.

Ans. If sponsored saving is less than sponsored investment in the economy, it means that the amount that the family is saving will not be sufficient for the investment of the firms, that is, the family wants to spend more. This will reduce the stock of available goods. The actual investment of the firms will be less than the sponsored investment.

They will be forced to employ more resources on less in order to maintain the level of inventory at the desired level. As a result the level of production, employment and income will increase. The ability to save will increase at higher levels of income. This process of change will continue till the time saving and investment are equal.

15. Explain how more savings lead to less savings?

Ans. If households save more in the economy, it means that they are reducing consumption. In other words, they buy less of the desired quantity of goods and services produced by the producers.

This increases the stock of unsold goods with the producers. To reduce the stock of unsold goods, producers reduce the price level and also reduce the use of resources.

As a result, there is a decrease in the level of production, employment and national income. Low level of income or level of employment has an adverse effect on the ability of families to save i.e. the level of savings decreases.Is . Thus, more savings reduce the saving level.

The value of Y will be determined by the values ​​of A and C. A = Autonomous Consumption + Autonomous InvestmentAs the value of A increases, the line shifts upwards. C → is the slope of the line, increasing in it, the line bends upwards.

17. How is the level of national income determined in the economy?

Ans. level of national income at that place AYis determined where aggregate demand and aggregate supplyare similar. aggregate demand means aggregate expenditureis done on consumption and investment goodsIs. Overall supply means that minimum amountis what the producer must get as a costNeeded

Therefore aggregate supply and national incomeare similar. aggregate demand at the equilibrium levelis called effective demand. so the level of incomeGrowth requires an increase in effective demand.Aggregate Demand (AD) Line and Aggregate Supply as shown in Fig.(AS) lines intersect each other at point E,where the level of income is set at 0Q.

18. When is the equilibrium level of national income determined before the full employment level?

Ans. If the demand at full employment level is not sufficient to maintain the possible output level, then the output level will decrease, resulting in some factor being idle. This happens when the equilibrium level of national income is determined before full employment. In such a situation, involuntary unemployment arises. This is a situation of deficient demand, because the level of demand is not sufficient to fully utilize the resources at the equilibrium level.

19. What is Cash Reserve Ratio (CRR)? How does the increase or decrease of CRR affect credit availability?

Ans. All commercial banks keep a part of their deposits with the Reserve Bank in the form of cash.This is called the cash reserve ratio. When the cash reserve ratio increases, the liquidity of banks decreases and so does their credit creation capacity. This is done to reduce excess demand. Cash reserve to boost demandThe ratio is reduced so that banks can create more credit.

20. What is the impact of the inclusion of the government sector on the economy?

Ans. Before solving the problems of lack of demand and surplus, we have to involve the state sector in the economic development of the economy. With the inclusion of the fiscal sector, there will now be three sectors—households, firms and the government. The government sector influences the level of output, income and employment.

(i) Effect of taxes – The government imposes taxes. Imposition of tax reduces disposable (spendable) income. Consumption expenditure depends on disposable income. Other things being equal, taxes (such as on foreign trade) reduce disposable income and thereby reduce consumption expenditure, causing the consumption curve to shift parallel to the downward slope. It is assumed from here that the rate of taxes remains the same.


LONG ANSWER TYPE QUESTIONS


1. Explain the fiscal measures to correct low demand.

Ans. Measures taken by the government to control aggregate demand and aggregate supply. They are called fiscal policy. Following are the fiscal measures to correct the demand deficiency-

(i) Budget – A detailed account of the estimate of government income-expenditure for an accounting year is called budget. In a situation of low demand, the government can increase the level of aggregate demand by increasing public expenditure more than income. If it is impossible to exceed the government expenditure in the spirit of public welfare, then the government can prevent the level of aggregate demand from decreasing by making a balanced budget.

(ii) Tax policy- Through tax policy, the government decides the rate of direct and indirect taxes. In the event of low demand, the government can make a liberal tax policy. In a liberal policy, the government levies taxes at a lower rate. At a lower rate of tax, the disposable income of the people becomes more. With the increase in disposable income, people’s consumption becomes more.

(iii) Wage Policy- Through this policy, the government fixes the rate of remuneration of the workers.Is . In order to correct the low demand, the government has made a liberal wage policy and the wages of the laborersAnd allowances can be increased. This increases the purchasing power of the workers. of goods and servicesDemand increases.

(iv) Through import-export-import, the economy purchases goods from the rest of the world. This increases the supply of goods. On the other hand, the economy through exports to the rest of the worldSells items. This reduces the supply of goods in the economy and aggregate demandincreases. Liberal export policy and strict import policy can be made to reduce the supply in case of low demand.

2. State the meaning of deficient demand. Explain the monetary measures to correct it.

Ans. If the demand for goods and services in the economy is at full employment level desired timeIf it is less than the production, then it is called short demand or demand deficiency.The measures taken by the central bank to correct the low demand are called monetary measures or monetary policy. These measures are as follows-

(i) Bank Rate – The rate at which the central bank of the economy lends orThe advance granted or deducted on payment of their bills is called bank rate. To correct the low demand, the central bank can lower the bank rate. By doing this it becomes cheaper for commercial banks to create credit and more credit is created. As a result the propensity to consume increases and the level of consumption becomes higher. The absence of aggregate demand starts decreasing.

(ii) Minimum deposit ratio- Commercial banks deposit some part of their deposits with the central bank. The rate at which a commercial bank has to deposit cash is called cash deposit ratio.

To correct low demand, the central bank changes the Cash Deposit Ratio (CRR) rate.can increase. By doing this, the amount of cash with the commercial banks will increase and they will be moreWill be able to create credit. As a result consumption propensity and consumption will be more. ThisThus the deficiency of overall demand will be reduced.

(iii) Statutory Liquidity Ratio-trade to meet the demand for demand deposits.Statutory Liquidity Ratio (SLR) is the rate at which a bank has to keep cash currency.They say.

To increase the demand deficit, the central bank can lower the SLR. This will increase the lending capacity of commercial banks. Due to more credit, the level of consumption will increase. The effect of lack of demand will be reduced. official

(iv) Open market operations Through these operations, the central bank can buy and sell securities with commercial banks.To meet the low demand, the central bank can sell government securities to the commercial banks. This leads to a flow of cash money from the central bank to the commercial banks and increases the credit creation capacity of the commercial banks. Consumption of households also increases. In this way demand deficiency can be controlled.

(v) Incentive to credit- In order to get rid of demand deficiency, apart from instructing commercial banks to create more and more credit, the central bank can also reward banks with more credit creation. More credit leads to increase in consumption.

3. State the meaning of excess demand. Explain the monetary measures to correct it.

Ans. In an economy, if the demand for goods and services is more than the desired output at full-employment level, then it is called excess demand or excess demand. The measures taken by the central bank to correct excess demand are called monetary policies. These measures are as follows-

Provides advances or cuts on payment of their bills is called bank rate Central bank can charge higher bank rate to cover excess demand. By doing this, it becomes expensive for commercial banks to create credit. Hence less credit is created. As a result the propensity to consume decreases and the level of consumption decreases. The excess of aggregate demand starts decreasing.

(ii) Cash deposit ratio- Commercial banks deposit some part of their deposits with the central bank. The rate at which a commercial bank has to deposit cash

(ii) Bank rate The rate at which the central bank of the economy lends orcalled cash deposit ratio.To cure excess demand, the central bank has increased the rate of Cash Deposit Ratio (CRR). By doing this, the amount of cash with the commercial banks will be less and they will be able to create less credit. As a result consumption propensity and consumption will decrease. In this way the excess of aggregate demand will be reduced.

(iii) Statutory Liquidity Ratio – trading volume to meet the demand for demand deposits.Statutory Liquidity Ratio (SLR) is the rate at which a bank has to keep cash currency.They say.

To reduce excess demand, the central bank can raise the SLR. Lending capacity of commercial banks will decrease. Due to less credit, the level of consumption will decrease and the effect of excess demand will be reduced.

(iv) Open market operations Through these operations the central bankCan buy and sell securities with commercial banks.

To recover excess demand, the central bank sells government securities to commercial banks.Can Due to this the flow of cash money starts from the commercial banks towards the central bank.and the credit creation capacity of commercial banks decreases. Consumption of families also lessIt happens . In this way excess demand can be controlled.

(v) Rationing of credit- If the central bank sets a higher limit for credit creation of commercial banks, then it is called rationing of credit. Due to credit rationing, commercial banks cannot create credit beyond a certain limit. In this way the consumption of the families also remains under control. Excess demand cannot go uncontrollable.

 4. Explain the traditional theory of income and employment.

Ans. In the traditional theories of income and employment J. B. Se’s market rule is the most important, according to Se’s rule, supply is the mother of its own demand. In other words, if there is production, a market is also created for it. The problem of over-production, unemployment and inflation does not arise in an economy that runs on the basis of price factor.

 If any of the above problems arise, it is automatically corrected by the flexible commodity price, flexible wage rate and flexible interest rate. Therefore, government intervention has been rejected in the traditional theory. Such automatic market processes, coupled with wage-price elasticity, are maintained in the following way.

(i) Commodity Market- On the basis of price elasticity, there is always a state of equilibrium in the commodity market. Supply is the mother of demand. Production generates income. The income created goes to the factors of production. The owners of the factors demand the goods. If at any point in time aggregate supply exceeds aggregate demand, then the general price level of the commodity falls due to price elasticity. Hence aggregate demand starts increasing. change in price The change in aggregate demand due toequals supply.

 (ii) According to the labor market, there has always been a situation of full employment in the labor market. If at any time involuntary unemployment arises, then wage flexibility automatically does it. Everyone gets work at the prevailing wage rate. In the state of unemployment the wage rate falls. The demand for labor is high at low wage rate. Hence it occurs at that point where relaxation would be more important in the production of goods and services.

(iii) According to the rules of the money market, both demand and supply of money are relative to interest.and both are in balance. Money is demanded for investment and money is saved through savings. Interest rate keeps savings and investment in equilibrium. In short, the equilibrium in the economy is determined by the flexible interest rate on flexible price, elastic wages. Automatic equilibrium is maintained by price-wage flexibility.

5. Explain the factors affecting consumption propensity.

Ans. The following factors affect the propensity to consume:

(i) National income j. M. Keynes has told the most important determinant of consumption tendency. Consumption increases with increase in income but consumption increases with increase in incomedecreases and it decreases when income decreases.

(ii) Distribution of income- When there is unequal distribution of wealth, the saving capacity of the rich of the society increases. As a result, the propensity to consume decreases. So consumptionEqual distribution of income is necessary for growth.

(iii) Future changes – Our attitudes are also affected by expectations towards future events. If there is a possibility of any war or other type of crisis, takeWill buy more items and this will boost the consumption trend.

(iv) Availability of credit – Installment and credit facilities are available to the consumers nowadays.Are engaged. Consumers buy new things like houses, cars etc. on credit or

By availing the facility, one can jump in the installments due to which the consumption tendency increases.

(v) Change in the rate of interest – If there is an increase in the interest, then the rate of interest will be higher.People save more by reducing consumption for the purpose of lifting. That is, consumption decreases.

(vi) Tax Policy- If the government imposes more taxes, then the disposable income decreases.As a result, the consumption propensity decreases and on the contrary, if the government reduces taxes, then the experiment goes on, as a result, the consumption propensity increases.

(vii) Dividend policy – ​​If corporation or joint stock companies secure more moneyi.e. less amount is distributed as dividend to the shareholders then people will get less income and consumption will be less.

(vii) Possibility of change in future – If people expect increase in income in future, then current consumption propensity increases and on the contrary, if people expect decrease in income in future, then present consumption propensity decreases.

16. What is fiscal policy? How can it control the situation of demand-deficit and demand? Or, describe the major fiscal plants.

Ans. Government receives public income from sources like taxation, public debt etc. and spends it on administration, defence, public services. all of thisThere are fiscal actions. The policy related to the direction and control of these activities is called fiscal policy. In other words, what is concerned with the control and direction of public expenditure is called ‘fiscal policy’. Public expenditure and public income are the main fiscal instruments. taxation, public

Main source of income. Now we will see how the plants are used to control the demand deficit and demand excess 17 situations. Public expenditure and taxation are two important fiscal measures through which the situations of excess demand and deficiency in demand are controlled.

7. What is monetary policy? How is it helpful in removing the situation of excess and ineffective demand?

Ans. The government’s policy related to the control and direction of the quantity of currency and credit is called ‘monetary policy’. Monetary policy is implemented by the central bank of the country. The Reserve Bank implements the monetary policy in India. The main function of monetary policy is to control the amount of credit for the fulfillment of certain objectives.

“An increase in the amount of credit leads to an increase in investment expenditure and thereby increases the level of aggregate demand. On the other hand, a decrease in the amount of credit leads to a decrease in investment expenditure and thereby reduces aggregate demand. In order to control the amount of credit, For this, all the measures adopted by the central bank are called instruments of monetary policy. The main monetary measures are as follows-

(i) affecting the credit creation capacity in which direction the credit capacity orInvestment expenditure is affected in the same direction as the liquidity position is affected.

8. Explain the difference between the traditional theory of employment and the theory of Keynes.

Traditionalist theoryKeynesian theory
(i) According to this theory, income and employment are determined at full employment level.(i) According to this theory, income and employment will be determined at the point where aggregate demand equals aggregate supply. For this, it is necessary to have full employment level.
(i) According to this theory, full employment is a normal condition of a capitalist economy.(ii) There is a general condition of imperfect employment equilibrium. Full-employment situation is an ideal situation.
(iii) The condition of full employment is found due to price wage elasticity.(iv) Aggregate supply is perfectly price elastic.
(iv) Time supply is perfectly inelastic to price.(iii) Due to price wage elasticity, supply is perfectly elastic and the economy can move from underemployment to full employment.
(v) It is based on the assumptions of market law of principle.(v) This theory is based on the psychological law of consumption.
(vi) In this theory there can be restrictive voluntary unemployment(vi) In this theory unemployment can occur due to deficient demand.
(vii) According to the traditional theory, the capitalist economy is governed by the price system, independent functioning of economic forces establishes equilibrium in the economy.(vii) Keynes supported government intervention in economic activities because he believed that aggregate demand and aggregate supply do not automatically adjust. This requires government intervention.
(viii) This theory is based on long standing belief.(viii) This theory is based on short term belief.
(ix) According to the traditional economists, there can be no possibility of general over-production and general unemployment in the economy.(ix) General overproduction and general unemployment are possible.

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FAQs


Q. What happens to national income if aggregate supply exceeds aggregate demand?

Ans. There is a tendency to decrease in national income.

Q. What happens to national income if aggregate demand exceeds aggregate supply?It happens?

Ans. There is a tendency to increase in national income.


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