Skip to content

Read the following… (Class 12 Economics SQP 2024-25, Q15)

questionbuddy.in/q/cbse-12-economics-2024-25-sqp-q15-text-carefully-union-finance-minister

EconomicsCBSE Class 12 · Sample paper, session 2024-25 · 4 marks · Short answer

CBSE Class 12 Economics sample paper 2024-25: question 15

From the official CBSE sample question paper for 2024-25, section A, question 15, for 4 marks. Try it first; the hints and our step-by-step solution are below.

Q15 · 4 marks · Short answerCompetency-basedDetermination of Income and Employment

Read the following text carefully:
“Union Finance Minister stated, that investments in infrastructure and productive capacity have a large multiplier impact on growth and employment and in view of this, capital investment outlay is being proposed to increase steeply in the Budget 2023-24 by 1,000 crore.”
Based on the given text and common understanding, explain the working process of the increase in investment on the National Income, assuming the Marginal Propensity to Save (MPS) as 20%.

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2024-25.

Hints

Open one hint at a time and try again before the next.

Hint 1

MPC = 1 − MPS.

Hint 2

Each round's spending is the next round's income.

Hint 3

The process ends when ΔS = ΔI.

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. The multiplier works because one person's expenditure is another's income. MPS = 0.2, so MPC = 0.8.

    1 mark

  2. Round 1: the extra ₹ 1,000 crore of investment becomes ₹ 1,000 crore of income for those who supply the goods and labour. They spend 80% (₹ 800 crore) and save ₹ 200 crore.

    1 mark

  3. Round 2: the ₹ 800 crore spent becomes new income; ₹ 640 crore of it is spent and ₹ 160 crore saved. Round 3: income ₹ 640 crore, spending ₹ 512 crore, saving ₹ 128 crore, and so on. The process stops when total extra saving equals the extra investment (₹ 1,000 crore).

    1 mark

  4. Multiplier k = 1/(1 − MPC) = 1/0.2 = 5, so total ΔY = 5 × 1,000 = ₹ 5,000 crore (ΔC = ₹ 4,000 crore, ΔS = ₹ 1,000 crore): income rises 5 times the investment.

    1 mark

Answer: With MPC = 0.8, k = 5: ₹ 1,000 crore of investment raises income in successive rounds (1,000, 800, 640, ...) by ₹ 5,000 crore in total.

Where the marks are

  • Working of the multiplier with schedule and k = 5 (marked as a whole, 4)

Revise the chapter

Practise this chapterBoard-style questions from Determination of Income and Employment, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2024-25: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.