Assertion (A): In the simple economy, if households together spend more than their present income, their aggregate income eventually rises to support the extra spending.
Reason (R): A single household that spends more than its income sees its own income rise by the same amount.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
Assertion (A): In the simple economy, if households together spend more than their present income, their aggregate income eventually rises to support the extra spending. — True. In the economy as a whole, extra spending raises firms’ output and factor payments, so aggregate income rises to match.
Reason (R): A single household that spends more than its income sees its own income rise by the same amount. — False. A single household’s spending is limited by its own income; its extra spending does not raise its own income.
The whole economy behaves differently from a single household, because income moves in a circle.
NCERT (2026-27): “2.2 Circular Flow of Income and Methods of Calculating National Income … Putting it differently, an economy may decide to spend more than the present level of income. But by doing so, its income will eventually rise to a level consistent with the higher spending level. This may seem a little paradoxical at first. But since income is moving in a circular fashion, it is not difficult to figure out that a rise in the flow at one point must eventually lead to a rise in the flow at all levels. This is one more example of how the functioning of a single economic agent (say, a household) may differ from the functioning of the economy as a whole. In the former the spending gets restricted by the individual income of a household. It can never happen that a single worker decides to spend more and this leads to an equivalent rise in her income. …” |