Income And Output Determination

Since the GDP is Rs.100 and the average saving propensity increases from 30% to 40%, the new saving is calculated as follows:

New Saving = 100 × 40% = 40 units.

However, the aggregate saving in equilibrium cannot exceed the autonomous investment, which remains at Rs. 30.

Hence, the correct answer is (c).

Given that the initial GDP is Rs.100 crores and the autonomous investment increases from Rs.30 crores to Rs.45 crores, we expect the GDP to rise in response to the increased investment.

This can be calculated using the investment multiplier. If the initial saving is Rs.30 crores, the GDP will adjust in the new equilibrium to Rs.150 crores.

Hence, the correct answer is (d).

In *Keynesian theory*, an increase in government expenditure raises income levels, which in turn raises aggregate savings as a function of GDP.

As income rises, fiscal deficit also increases, assuming the government expenditure continues.

Therefore, the correct order is (C), (D), (A), (B). Hence, the correct answer is (b).

When the central bank raises the *repo rate*, it leads to a reduction in investment demand, which subsequently causes a decrease in employment and income.

As a result, *demand-pull inflation* falls.

Therefore, the correct order is (D), (B), (A), (C). Hence, the correct answer is (c).

At steady state in the Solow model:

(A) The capital-labor ratio stabilizes.

(C) Income per capita is constant.

Thus, the correct answer is (c).

Step 1: Understanding the Classical and Keynesian models.
- In the classical model, the AS curve is vertical, meaning output is determined by supply factors like labor and capital. - In the Keynesian model, the AS curve is upward sloping, indicating that output increases as prices rise. - Classical AD depends primarily on money supply, while Keynesian AD depends on various factors including investment and consumption, not just capital stock.

Step 2: Analysis of options.
- (A) Classical AS schedule is vertical: This is correct. The AS curve is vertical in the classical model.
- (B) Keynesian AS schedule slopes upward to the right: This is correct. The Keynesian AS curve is upward sloping.
- (C) Classical AD schedule depends only on the level of money supply: This is correct. In the classical model, AD depends on the money supply.
- (D) Keynesian AD schedule depends only on the existing capital stock: This is incorrect. The Keynesian AD schedule is influenced by more factors than just capital stock.

Step 3: Conclusion.
The incorrect statement is (D), as Keynesian AD depends on more than just the capital stock.

Step 1: Understanding equilibrium in national income.
In equilibrium, desired investment equals realised investment. If desired investment exceeds realised investment, firms will find their inventories accumulating as they produce more than is being sold.

Step 2: Analysis of options.
- (A) Unintended inventory accumulation: This is correct. If , firms produce more than they sell, leading to an unintended accumulation of inventories.
- (B) Unintended inventory shortfall: This is incorrect. A shortfall occurs when realised investment exceeds desired investment.
- (C) No change in inventory stock: This is incorrect. A mismatch between desired and realised investment leads to a change in inventory stock.
- (D) Increasing tax rate: This is unrelated. The condition for equilibrium is about investment, not tax rates.

Step 3: Conclusion.
The correct answer is (A), as unintended inventory accumulation occurs when .

Step 1: IS Curve Explanation.
The IS curve represents the equilibrium in the goods market, showing the relationship between the interest rate and income.

Step 2: Statement Analysis:
- (A) The IS curve indeed shows combinations where the goods market is in equilibrium. - (B) It is negatively sloped because higher interest rates reduce investment, leading to lower output. - (C) A steeper IS curve occurs when investment is more sensitive to interest rates. - (D) An increase in government spending shifts the IS curve to the right, which is a true statement but does not apply to this question's focus.

Step 3: Conclusion.
Thus, the correct statements are (A), (B), and (C), so the correct answer is (2).