Excess Demand and Deficient Demand
Read the passage carefully and answer the following questions:
The equilibrium output in the economy determines the level of employment, given the quantity of other factors of production. This means that the level of output determined by equality of income with aggregate demand does not necessarily mean the level of output at which everyone is employed.
Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Equilibrium only means that, if left to itself, the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to a decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to a rise in prices in the long run.
The rate of increase in ex-ante consumption due to a unit increment in income is called?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Marginal Propensity to Consume.
Consumption has two parts. Autonomous consumption takes place even when income is zero; induced consumption depends on income, and when income rises by Re 1 it rises by a fraction c. That fraction, the rate at which planned (ex ante) consumption increases for each unit increase in income, is the marginal propensity to consume (MPC):
MPC = ΔC / ΔY
A change in consumption can never exceed the change in income, so the MPC lies between 0 and 1.
Why the other options are incorrect
Option (1) Average Propensity to Consume. — Incorrect. APC = C/Y is consumption per unit of income at one level of income, a ratio of totals and not of changes.
Option (3) Investment Multiplier. — Incorrect. The multiplier is the change in income per unit change in autonomous investment, 1/(1 − MPC); it is built from the MPC but is not the MPC.
Option (4) Autonomous Consumption. — Incorrect. Autonomous consumption is the part of consumption that does not depend on income at all.
Note 1: This passage is taken from section 4.4, Some More Concepts, of the Determination of Income and Employment chapter of the NCERT book Introductory Macroeconomics, with a few lines trimmed. Read every chapter to its last page, the short closing sections included. These two paragraphs sat at the very end of the chapter, and five questions were built on them.
Note 2: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 23-05 S2 24-05 S1* | – | – | – | – |
* A similar question.
NCERT (2025-26): “4.1.1. Consumption … Autonomous consumption is denoted by C and shows the consumption which is independent of income. If consumption takes place even when income is zero, it is because of autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income. When income rises by Re 1. induced consumption rises by MPC i.e. c or the marginal propensity to consume. It may be explained as a rate of change of consumption as income changes.” |