 # Sandeep Garg Macroeconomics Class 12 - Chapter 8: Income Determination and Multiplier

Sandeep Garg Class 12 Macroeconomics Solutions Chapter 8: Income Determination and Multiplier are explained by the expert economic teachers from the latest edition of Sandeep Garg Macroeconomics Class 12 textbook solutions.

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## Sandeep Garg Solutions Class 12 – Chapter 8 – Part B

Question 1

Calculate multiplier if MPC is : (i) 0.75 (ii) 0.90

Solution:

(i) Multiplier (k) =

$$\begin{array}{l}\frac{1}{1-MPC}\, =\, \frac{1}{1-0.75}\, =\, \frac{1}{0.25}\, =\, 4\end{array}$$

(ii) Multiplier (k) =

$$\begin{array}{l}\frac{1}{1-MPC}\, =\, \frac{1}{1-0.90}\, =\, \frac{1}{0.10}\, =\, 10\end{array}$$

Question 2

Calculate the value of multiplier if the MPS is: (a) 0.40 (b) Equal to MPC

Solution:

(a) Multiplier (k) =

$$\begin{array}{l}\frac{1}{MPS}\, =\, \frac{1}{0.40}\,=\, 2.5\end{array}$$

(b) If MPS = MPC, then MPS = 0.5

Multiplier (k) =

$$\begin{array}{l}\frac{1}{MPS}\, =\, \frac{1}{0.5}\,=\, 2\end{array}$$

Question 3

In an economy, income generated is four times the increase in investment expenditure. Calculate the values of MPC and MPS

Solution:

Multiplier 4

(a) Multiplier (k) =

$$\begin{array}{l}\frac{1}{1-MPC}\,\end{array}$$

4=

$$\begin{array}{l}\frac{1}{1-MPC}\,\end{array}$$

1- MPC =

$$\begin{array}{l}\frac{1}{4}\,\end{array}$$

MPC= 0.75

MPS =1 – MPC

= 1 – 0.75

MPS= 0.25

Question 4

In a two-sector economy, the saving function is given as S = – 10 + 0.2Y and investment function is expressed as I = – 3 + 0.1Y. Calculate the equilibrium level of income?

Solution:

Equilibrium level of income (Y) is attained when S= I.

It means that:

-10 + 0.2Y = – 3 + 0.1Y

0.2Y – 0.1Y = – 3 +10

0.1Y = 7

Y=70

Equilibrium level of income = 70

Explore link: Aggregated Demand and Related Concepts solutions

Question 5

What are the two approaches for determining the equilibrium level of income?

Solution:

The two approaches for determining the equilibrium level of income are as follows:

1. AD (or C+ I) and AS approach: Equilibrium is achieved when planned expenditure of the economy (AD) is equal to the planned availability of goods and services (AS), i.e., when AD=AS
2. Saving and Investment Approach: Equilibrium level of income is determined at the level where planned saving is equal to planned investment. I.e., when S=1

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