Ch 8 macro test

1. What is investment multiplier? Explain its working using a suitable numerical example. (4)

2. 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?  (2)

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 = 7

3. Explain the following using a diagram:-   (3)

1. Full employment equilibrium
2. Underemployment equilibrium
3. Over full employment equilibrium

4. Explain determination of equilibrium level of income using ‘consumption plus investment’ approach.   (3)