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# CA Foundation | Keynesian Theory of Determination of National Income MCQ Test | Chanakya Commerce Classes

CA Foundation Paper 4 Business Economics Chapter 6 Unit 2 Keynesian theory of determination of national income MCQ test page with instant scoring by Chanakya Commerce Classes.

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The keynesian theory of determination of national income MCQ Test
HOME > Study Material > Business Economics > The keynesian theory of determination of national income
CA Foundation · Paper 4 · Business Economics
Chapter 6 · Unit 2
The keynesian theory of determination of national income
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30 MCQs
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Question 1
According to Keynes, the equilibrium level of national income is determined at the point where:
Saving equals investment plus taxes
Aggregate demand equals aggregate supply
Consumption equals income
Money supply equals money demand
Correct Answer: Aggregate demand equals aggregate supply.
In the simple Keynesian model, income and employment are determined where planned aggregate expenditure is just enough to buy the output produced.
Question 2
In the Keynesian framework, effective demand refers to:
Desire for goods without purchasing power
Demand created only by government expenditure
That level of aggregate demand which is backed by actual spending and equals aggregate supply at equilibrium
Demand for capital goods only
Correct Answer: That level of aggregate demand which is backed by actual spending and equals aggregate supply at equilibrium.
Keynes used the term effective demand for the demand that actually influences output and employment decisions.
Question 3
The aggregate demand function in a two-sector Keynesian economy is:
C + I
C + S
C + T + G
W + R + I
Correct Answer: C + I.
In the simplest two-sector model, aggregate demand is the sum of consumption expenditure and investment expenditure.
Question 4
In the Keynesian theory, aggregate supply price means:
The price of one unit of final output
The minimum money wage paid to labour
The total expected receipts from selling output
The minimum receipts needed to induce producers to employ a given number of workers
Correct Answer: The minimum receipts needed to induce producers to employ a given number of workers.
Aggregate supply price shows the proceeds entrepreneurs must expect to make employment worthwhile.
Question 5
If consumption increases by ₹80 when income increases by ₹100, the marginal propensity to consume is:
0.20
0.80
1.25
0.50
Correct Answer: 0.80.
MPC = change in consumption divided by change in income = 80/100 = 0.80.
Question 6
If MPC = 0.75, then marginal propensity to save will be:
0.25
0.75
1.75
Cannot be determined
Correct Answer: 0.25.
MPC + MPS = 1. So MPS = 1 - 0.75 = 0.25.
Question 7
The average propensity to consume is equal to:
Saving divided by income
Change in consumption divided by change in income
Consumption divided by income
Income divided by consumption
Correct Answer: Consumption divided by income.
APC is the ratio of total consumption to total income at a given level of income.
Question 8
Which of the following is most consistent with Keynes's psychological law of consumption?
Consumption rises in the same proportion as income
Consumption falls when income rises
Income is always fully consumed
Consumption rises with income, but by less than the rise in income
Correct Answer: Consumption rises with income, but by less than the rise in income.
This is the essence of Keynes's fundamental psychological law, and it implies positive but less than one MPC.
Question 9
The simple investment multiplier is:
1 / MPC
1 / MPS
MPC / MPS
MPS / MPC
Correct Answer: 1 / MPS.
Since MPS = 1 - MPC, the investment multiplier k = 1/(1 - MPC) = 1/MPS.
Question 10
If MPC = 0.60, the value of the multiplier will be:
2.5
1.6
4.0
5.0
Correct Answer: 2.5.
k = 1/(1 - 0.60) = 1/0.40 = 2.5.
Question 11
If an increase in investment of ₹200 crore leads to an increase in income of ₹800 crore, the multiplier is:
2
3
4
5
Correct Answer: 4.
Multiplier = change in income / change in investment = 800 / 200 = 4.
Question 12
Which of the following is treated as autonomous in the simple Keynesian model?
Induced consumption
Savings arising from higher income
Tax revenue linked to income
Investment expenditure
Correct Answer: Investment expenditure.
In the simple model, investment is generally taken as autonomous, meaning it does not vary with current income.
Question 13
The 45° line in the Keynesian income-expenditure diagram represents points where:
Income equals expenditure
Saving equals investment
Consumption equals saving
Aggregate supply is zero
Correct Answer: Income equals expenditure.
Every point on the 45° line satisfies Y = AE in the diagram.
Question 14
At the equilibrium level of income in a two-sector economy:
Consumption equals saving
Planned saving equals planned investment
MPC equals APC
Income equals autonomous consumption
Correct Answer: Planned saving equals planned investment.
The saving-investment approach and the aggregate expenditure approach describe the same equilibrium.
Question 15
When aggregate demand exceeds aggregate supply at a given income level, firms tend to:
Reduce output
Keep output unchanged permanently
Increase output and employment
Increase saving only
Correct Answer: Increase output and employment.
Excess demand signals that produced output is insufficient, so firms expand production.
Question 16
Underemployment equilibrium means an equilibrium:
Possible only in the long run
Where all resources are fully employed
Where prices keep falling endlessly
Where income is in equilibrium but less than full-employment output
Correct Answer: Where income is in equilibrium but less than full-employment output.
Keynes argued that the economy can settle at an equilibrium even with unemployment due to deficient demand.
Question 17
Which assumption is commonly made in the simple Keynesian model of income determination?
Prices are assumed constant in the short run
Output is fixed at full employment
Interest rate is the only determinant of consumption
There is no saving in the economy
Correct Answer: Prices are assumed constant in the short run.
This lets changes in demand affect output and employment rather than prices in the basic model.
Question 18
If the consumption function is C = 100 + 0.8Y, autonomous consumption is:
0.8
100
Y
80
Correct Answer: 100.
The intercept term in the consumption function is autonomous consumption.
Question 19
Given C = 50 + 0.75Y and I = 100, equilibrium income will be:
400
500
600
750
Correct Answer: 600.
At equilibrium, Y = C + I = 50 + 0.75Y + 100. So 0.25Y = 150 and Y = 600.
Question 20
If MPS is high, the value of the multiplier will generally be:
Low
High
Equal to one
Negative
Correct Answer: Low.
Multiplier = 1/MPS. So a higher MPS means a smaller multiplier.
Question 21
Leakages in the circular flow reduce the value of the multiplier because they:
Increase induced investment
Raise the marginal efficiency of capital
Make aggregate supply perfectly elastic
Reduce the re-spending of additional income
Correct Answer: Reduce the re-spending of additional income.
Every leakage such as saving, taxes or imports slows down the chain reaction of spending.
Question 22
Which one of the following will shift the aggregate demand function upward in the simple Keynesian model?
Fall in autonomous investment
Rise in autonomous investment
Rise in MPS with no other change
Fall in consumption function intercept
Correct Answer: Rise in autonomous investment.
An increase in autonomous investment raises planned expenditure at each income level.
Question 23
The relation between APC and APS at any level of income is:
APC - APS = 1
APC × APS = 1
APC + APS = 1
APC = APS always
Correct Answer: APC + APS = 1.
Income is either consumed or saved. Therefore C/Y + S/Y = 1.
Question 24
If the economy is in equilibrium and firms notice unintended accumulation of inventories, then:
Actual output is greater than planned expenditure
Planned expenditure is greater than actual output
Investment has become zero
MPC has become one
Correct Answer: Actual output is greater than planned expenditure.
Unintended stock accumulation means goods are not being sold as expected, so firms will reduce output.
Question 25
Which statement about the multiplier is correct?
It shows how income falls when savings rise directly
It measures the change in investment caused by a change in income
It works only under full employment conditions
It shows how a change in autonomous spending leads to a multiple change in income
Correct Answer: It shows how a change in autonomous spending leads to a multiple change in income.
This is the basic meaning of the Keynesian multiplier process.
Question 26
If the multiplier is 5, the marginal propensity to consume must be:
0.20
0.80
0.50
0.25
Correct Answer: 0.80.
If k = 5, then 1/(1 - MPC) = 5. Therefore 1 - MPC = 0.20 and MPC = 0.80.
Question 27
If saving function is S = -40 + 0.2Y and planned investment is ₹60, equilibrium income will be:
200
300
500
600
Correct Answer: 500.
At equilibrium, S = I. So -40 + 0.2Y = 60, giving 0.2Y = 100 and Y = 500.
Question 28
According to Keynes, deficiency of aggregate demand may lead to:
Involuntary unemployment
Automatic full employment
Perfect wage flexibility
Continuous inflation only
Correct Answer: Involuntary unemployment.
This is central to Keynesian theory: inadequate demand can keep willing workers unemployed.
Question 29
Which of the following best explains why the Keynesian aggregate expenditure curve is flatter than the 45° line?
Because prices are rising faster than output
Because full employment has already been achieved
Because APS is always negative
Because induced consumption rises less than proportionately with income
Correct Answer: Because induced consumption rises less than proportionately with income.
Since MPC is less than one, aggregate expenditure increases with income but not one-for-one.
Question 30
If autonomous expenditure increases, equilibrium national income will rise by a multiple that depends mainly on:
Average propensity to save
Marginal propensity to consume
Rate of inflation only
Population growth only
Correct Answer: Marginal propensity to consume.
The size of the multiplier is mainly governed by MPC. Higher MPC gives a larger multiplied rise in income.
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MCQ Test · Chapter 6 · Unit 2 · The Keynesian Theory of Determination of National Income