Tag: theories of distribution

Questions Related to theories of distribution

Equilibrium beyond the full employment level does not lead to rise in output level. 

  1. True

  2. False


Correct Option: A
Explanation:

The level of output will not rise as economy is already at full employment level and there is no idle capacity in the economy.

According to Keynes, the equilibrium level of income is always determined corresponding to full employment level. 

  1. True

  2. False


Correct Option: B
Explanation:

False.
 The equilibrium level on income may be determined at a level less than full employment where the market is clear even in under utilization of resources , more than the full employment where market is clear even if resources are over utilized or equal to level of full employment. 

 In determination of Equilibrium Level of Income by AD-AS approach, AD curve is represented by ____________.

  1. (C + S) curve

  2. (C + I) curve

  3. (S + I) curve

  4. (C +Y) curve


Correct Option: A
Explanation:

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

The Ad curve in income determination analysis represents a two sector economy which only includes the expenditure made by the consumer sector and the producer sector.

Therefore, aggregate demand = consumption + investment = C + I.

The two approaches to determination of the equilibrium level of income are:

  1. Aggregate demand-Aggregate supply approach

  2. Saving-Investment approach

  3. Demand-Supply approach

  4. Both A & B


Correct Option: D
Explanation:

Two approaches are:

1) Aggregate demand-Aggregate supply approach-
An economy is in equilibrium when aggregate demand for goods and services is equal to aggregate supply during a period of time.

So, equilibrium is achieved when:

AD = AS … (1)

We know, AD is the sum total of Consumption (C) and Investment (I):

AD = C + I … (2)

Also, AS is the sum total of consumption (C) and saving (S):

AS = C + S … (3)

Substituting (2) and (3) in (1), we get:

C + S = C + I.....(4)

2)Saving-Investment approach 

According to this approach, the equilibrium level of income is determined at a level, when planned saving (S) is equal to planned investment (I).

from equation( 4)

 S = I

When aggregate supply exceeds aggregate demand or when investment is less than savings, _____________ will decrease.

  1. savings

  2. price

  3. income

  4. all of the above


Correct Option: C
Explanation:

When aggregate supply is more than aggregate demand or when investment is less than savings, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the production output till Aggregate demand becomes equal to Aggregate supply. Therefore, level of national income reduces to the level of aggregate demand in the economy.

When aggregate demand exceeds aggregate supply or when investment is greater than savings, _____________ will increase.

  1. price

  2. income

  3. savings

  4. all of the above


Correct Option: B
Explanation:

When aggregate demand is more than aggregate supply or when investment is more than saving in the economy , then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers will expand the output. Therefore, as a result of more output in the economy, the income will increase. 

______________ propounded the Liquidity Preference Theory of Interest.

  1. Adam Smith

  2. Marshall

  3. Keynes

  4. None of the above


Correct Option: C
Explanation:

Liquidity Preference theory refers to the preference of the people to hold wealth in the form of liquid cash rather than in other non-liquid assets like bonds, securities, bills of exchange, land, building, gold etc. According to the liquidity preference theory of interest, interest rates on short-term securities are lower because investors are not sacrificing liquidity for greater time frames as in medium or longer-term securities. 

The theory was propounded by Keynes as a part of his Macro economic studies. 

_______________ means the preference of the people to hold wealth in the form of liquid cash rather than in other non-liquid assets like bonds, securities, bills of exchange, land, building, gold etc.

  1. Demand preference

  2. Liquidity preference

  3. Supply preference

  4. Transaction preference


Correct Option: B
Explanation:

Liquidity Preference theory refers to the preference of the people to hold wealth in the form of liquid cash rather than in other non-liquid assets like bonds, securities, land, building, gold etc. According to the liquidity preference theory of interest, interest rates on short-term securities are lower because investors are not sacrificing liquidity for greater time frames as in medium or longer-term securities.

$M _1$ is also known as transaction money because it can be directly used for making transactions. 

  1. True

  2. False


Correct Option: A
Explanation:

$M _1$ consists of  currency notes and coins that are in circulaation with public as well as the demand deposits with commercial banks. These can be used by the public directly for any transactions. Hence, $M _1$ is also known as 'Transaction Money'.

Demand deposits include __________________.

  1. Saving account deposits and fixed deposits

  2. Saving account deposits and current account deposits

  3. Current account deposits and fixed deposits

  4. All types of deposits


Correct Option: B
Explanation:

Demand deposit refers to the deposit wherein the amount which you have deposited with the bank can be withdrawn by you any time. It includes saving account deposit and currency account deposit in which currency account is mainly meant for businessmen, and saving account is meant for general public.