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(I) Suppose in a… (Class 12 Economics SQP 2025-26, Q16B)

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EconomicsCBSE Class 12 · Sample paper, session 2025-26 · 6 marks · Long answer

CBSE Class 12 Economics sample paper 2025-26: question 16(B)

From the official CBSE sample question paper for 2025-26, section A, question 16(B), for 6 marks. Try it first; the hints and our step-by-step solution are below.

Q16(B) · 6 marks · Long answerDetermination of Income and Employment

(I) Suppose in a hypothetical economy, people save 20% of their additional income. Ex-Ante Investments equals ₹ 100 and the equilibrium level of income stands at ₹ 700. Calculate dissavings at zero level of income. [2]
(II) Define Effective Demand. Explain the adjustment mechanism to attain the level of Effective Demand, if ex-ante Aggregate Demand is more than ex-ante Aggregate Supply. [4]

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2025-26.

Hints

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

Hint 1

Saving = −c̄ + MPS × Y.

Hint 2

At equilibrium planned saving equals planned investment.

Hint 3

Falling inventories signal firms to produce more.

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. (I) MPS = 20% = 0.2; ex-ante investment I = ₹ 100; equilibrium Y = ₹ 700. At equilibrium, S = I.

    ½ mark

  2. S = −c̄ + MPS × Y, so −c̄ + 0.2 × 700 = 100

    ½ mark

  3. −c̄ + 140 = 100, so c̄ = 40

    ½ mark

  4. Dissaving at zero income = ₹ 40

    ½ mark

  5. (II) Effective demand is the level of aggregate demand that is exactly matched by aggregate supply, that is, AD at equilibrium.

    1 mark

  6. If ex-ante AD > ex-ante AS, households and firms plan to buy more than firms plan to produce. Firms meet the extra demand from stock, so inventories fall below the desired level.

    1½ marks

  7. To restore inventories, producers raise output and employment. Output keeps rising until planned AD equals planned AS; this level is the effective demand.

    1½ marks

Answer: (I) Dissaving at zero income = ₹ 40. (II) Effective demand is the AD matched by AS; when AD > AS, inventories fall, firms raise output and employment until AD = AS.

Where the marks are

  • Saving function and S = I (½ + ½)
  • Working and answer (½ + ½)
  • Meaning of effective demand (1)
  • Adjustment mechanism (3)

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 2025-26: 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.