4 Marks Question

Question 14 Marks

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%.

Answer

The working process of the increase in investment on the National Income, is based on the assumption that one's expenditure is another's income.
In Round 1, the investment in infrastructure undertaken by the government of 1,000 crore, will generate an additional income by the like amount (1,000 crore). Since Marginal Propensity to Save (MPS) is 0.2 i.e. MPC is 0.8 it will lead to an increase in the consumption expenditure by 800 crore (80% of 1,000) and saving by 200 crore (20% of 1,000).
As one's expenditure is another's income, an increase in consumption expenditure results in an increase in income by 800 crore in the subsequent round. This process continues till the sum of the change in savings becomes equal to the change in the investment.

Investment Multiplier $=\frac{1}{1- MPC }$
$=\frac{1}{1-0.8}=5$
Thus, the above schedule indicates that an increase in investment (∆I) of 1,000 crore leads to a total increase in national income (∆Y) by 5,000 crore, which is 5 times the increase in investment.

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Question 24 Marks

For two hypothetical economies A and B, the value of Marginal Propensity to Consume (MPC) stands at 0.6 and 0.8 respectively. Assuming for both the economies, Autonomous Consumption $(\overline{ c })$ to be ₹ 40 crore and Investment Expenditure (I) to be ₹ 100 crore.
Calculate:
(i) Break-even level of income for Economy A
(ii) Equilibrium level of income for Economy B

Answer

Given
Autonomous Consumption (c) = ₹ 40 crore
Investment expenditure (1) = ₹ 100 crore
For economy A, Marginal Propensity to Consume (MPC) = 0.6
For economy B, Marginal Propensity to Consume (MPC) = 0.8
(1) At break-even level for economy A; Y = C
Y= 40 +0.6Y
0.4Y = 40
Y= 100 crore
(II) Equilibrium level of income for economy B; Y= C +1
$Y =\overline{ c }+( MPC ) x Y + I$
Y= 40+ 0.8Y + 100
Y=₹ 700 crore

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Question 34 Marks

“Saving curve can be derived from the consumption curve” Justify the statement, citing valid steps with the help of a well-labelled diagram.

Answer

Given consumption curve (C) intersecting 45° line at B (Break-even level of income). Steps for derivation of saving curve from the consumption curve are as follows:
1. Take OA on the negative intercept on Y-axis equals to OC (Autonomous consumption) having positive intercept on Y-axis, as a starting point of the saving curve.
2. Draw a perpendicular from point B (where, Y=C) intersecting the X-axis at B' (where S=0) which is another point on the saving curve.
3. Join point A to point B' extending the line till point S to get the saving curve (AS).

For Visually Impaired Candidates:
Given consumption curve (C) intersecting 45° line at B (Break-even level of income). Steps for derivation of saving curve from the consumption curve are as follows:
1. Take OA on the neqative intercept on Y-axis equals to OC (Autonomous consumption) having positive intercept on Y-axis, as a starting point of the saving curve.
2. Draw a perpendicular from point B (where, Y=C) intersecting the X-axis at B' (where S=0) which is another point on the saving curve.
3. Join point A to point B' extending the line till point S to get the saving curve (AS).
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Question 44 Marks

(i) ‘Foreign Portfolio Investment (FPI) witnessed a sharp turnaround during 2023-24 with net FPI inflows of US$ 32.4 billion.’
In which sub-account and on which side of the Balance of Payments account the above transaction will be recorded? Give reasons in support of your answer.
(ii) State the meaning of ‘Balance of Payments Deficit’.

Answer

(1) Foreign Portfolio Investments in India in the fiscal year 2023-24 will be recorded on the credit side of the capital account of the Balance of Payments (BOP) account.
It is recorded on the credit side, as it results in the inflow of foreign exchange. Furthermore, such transactions are documented in the capital account as they reflect the change in the ownership of financial assets between the residents of a country and rest of the world.
(II) Balance of Payments deficit occurs when autonomous receipts fall short of autonomous payments during a given fiscal year in an economy

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Economics 4 Marks Question

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