Question

Read the passage given below and answer the following questions.

The Great Depression of 1930s proved that without the government’s intervention, the economy cannot create employment opportunities. In India, MGNREGA programmes are based on Keynesian aggregate demand strategy of direct job creation by the government. MGNREGA increases the purchasing power of those individuals whose MPC is the highest.

1. What is meant by MPC? [1]
2. State the components of aggregate demand. [2]
3. How is MPS obtained from MPC? [3]

Answer 1

(i)

MPC represents Marginal Propensity to Consume. The MPC is the ratio of the change in consumption to the change in income.

(ii)

The components of Aggregate Demand are as follows:

Aggregate Demand = Consumption Expenditure + Investment Expenditure + Government Expenditure + Net Exports

1. Consumption Expenditure is the money households spend on goods and services they use.
2. Investment Expenditure is the money that businesses spend on things like buildings, capital equipment, raw materials, and so on.
3. The term “government expenditure” refers to the money spent by the government on both ongoing and one-time projects.
4. The difference between total exports and total imports is known as net exports.

(iii)

The percentage of extra income that is saved rather than consumed is known as the marginal propensity to save, or MPS. The following formula is used to determine the MPS:

MPS = l − MPC