CA Foundation P4 · Chapter 5
Determination of National Income MCQs with Answers
15 multiple-choice questions on Determination of National Income for CA Foundation P4 Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Gross National Product (GNP) is equal to:
- A) GDP minus depreciation
- B) GDP plus net indirect taxes
- C) GDP plus net factor income from abroad
- D) GDP minus net exports
Show answer & explanation
Answer: C) GDP plus net factor income from abroad
GDP measures output produced within the domestic territory. GNP measures income of normal residents, so GNP = GDP + NFIA (factor income received from abroad minus factor income paid abroad). GDP minus depreciation gives NDP.
Question 2
Given: GDP at market prices = Rs. 5,000 crore; depreciation = Rs. 400 crore; net factor income from abroad = -Rs. 100 crore; net indirect taxes = Rs. 300 crore. NNP at factor cost (national income) is:
- A) Rs. 4,200 crore
- B) Rs. 4,400 crore
- C) Rs. 4,600 crore
- D) Rs. 4,800 crore
Show answer & explanation
Answer: A) Rs. 4,200 crore
GNP at MP = GDP at MP + NFIA = 5,000 + (-100) = 4,900. NNP at MP = 4,900 - 400 = 4,500. NNP at FC = NNP at MP - net indirect taxes = 4,500 - 300 = Rs. 4,200 crore. Rs. 4,400 crore results from treating NFIA as +100 instead of -100 (5,000 - 400 + 100 - 300).
Question 3
A farmer grows wheat worth Rs. 500 (no purchased inputs) and sells it to a miller, who makes flour sold to a baker for Rs. 800. The baker sells bread to consumers for Rs. 1,200. The contribution of this chain to GDP is:
- A) Rs. 2,500
- B) Rs. 1,700
- C) Rs. 1,200
- D) Rs. 700
Show answer & explanation
Answer: C) Rs. 1,200
Under the value added method, value added = farmer 500 + miller (800 - 500) 300 + baker (1,200 - 800) 400 = Rs. 1,200, which equals the value of the final good. Adding all sales (500 + 800 + 1,200 = 2,500) double-counts intermediate goods.
Question 4
Which of the following is excluded from national income?
- A) Wages paid to government employees
- B) Imputed rent of owner-occupied houses
- C) Old-age pension paid by the government
- D) Mixed income of self-employed persons
Show answer & explanation
Answer: C) Old-age pension paid by the government
Old-age pensions are transfer payments - no productive service is rendered in return - so they are excluded. Government wages, imputed rent of owner-occupied dwellings and mixed income of the self-employed are payments for productive services and are included.
Question 5
In an open economy, private consumption expenditure = Rs. 3,000 crore, gross investment = Rs. 800 crore, government final consumption expenditure = Rs. 900 crore, exports = Rs. 400 crore and imports = Rs. 600 crore. GDP at market prices is:
- A) Rs. 5,700 crore
- B) Rs. 4,500 crore
- C) Rs. 4,700 crore
- D) Rs. 5,100 crore
Show answer & explanation
Answer: B) Rs. 4,500 crore
By the expenditure method, GDP = C + I + G + (X - M) = 3,000 + 800 + 900 + (400 - 600) = 4,700 - 200 = Rs. 4,500 crore. Rs. 4,700 crore ignores net exports, and Rs. 5,700 crore wrongly adds imports.
Question 6
Nominal GDP of a year is Rs. 6,600 crore and the GDP deflator for that year is 120 (base year = 100). Real GDP is:
- A) Rs. 7,920 crore
- B) Rs. 5,500 crore
- C) Rs. 6,480 crore
- D) Rs. 5,280 crore
Show answer & explanation
Answer: B) Rs. 5,500 crore
Real GDP = Nominal GDP / GDP deflator x 100 = 6,600 / 120 x 100 = Rs. 5,500 crore. Multiplying instead of dividing gives 7,920. Real GDP is below nominal GDP because prices have risen since the base year.
Question 7
If the marginal propensity to consume is 0.8, the value of the investment multiplier in a simple two-sector Keynesian model is:
- A) 1.25
- B) 8
- C) 5
- D) 0.2
Show answer & explanation
Answer: C) 5
Multiplier k = 1/(1 - MPC) = 1/MPS = 1/(1 - 0.8) = 1/0.2 = 5. 1.25 is 1/MPC, a common error, and 0.2 is the MPS itself.
Question 8
In a two-sector economy, C = 100 + 0.75Y and autonomous investment I = 200 (Rs. crore). Equilibrium national income is:
- A) Rs. 400 crore
- B) Rs. 900 crore
- C) Rs. 1,200 crore
- D) Rs. 1,600 crore
Show answer & explanation
Answer: C) Rs. 1,200 crore
Equilibrium: Y = C + I = 100 + 0.75Y + 200, so 0.25Y = 300 and Y = 300/0.25 = Rs. 1,200 crore. Check: C = 100 + 0.75 x 1,200 = 1,000; C + I = 1,200. Rs. 400 crore results from dividing autonomous spending by the MPC (300/0.75) instead of the MPS.
Question 9
The 'paradox of thrift' suggests that:
- A) Higher saving always leads to higher investment and income
- B) Saving and consumption always increase together
- C) Thrift by individuals has no effect on aggregate demand
- D) An attempt by all households to save more may leave total saving unchanged or lower, because income falls
Show answer & explanation
Answer: D) An attempt by all households to save more may leave total saving unchanged or lower, because income falls
In the Keynesian model, a rise in the desire to save reduces consumption and aggregate demand. Through the multiplier, income falls, and with lower income realised saving may not rise (and can fall if investment depends on income). What is virtuous for an individual may be harmful for the economy as a whole.
Question 10
In a three-sector economy (Rs. crore): C = 50 + 0.8Yd, where Yd = Y - T; lump-sum tax T = 100; investment I = 100; government expenditure G = 150. Equilibrium income is:
- A) Rs. 1,500 crore
- B) Rs. 1,000 crore
- C) Rs. 1,100 crore
- D) Rs. 1,400 crore
Show answer & explanation
Answer: C) Rs. 1,100 crore
Y = C + I + G = 50 + 0.8(Y - 100) + 100 + 150 = 50 - 80 + 250 + 0.8Y = 220 + 0.8Y. So 0.2Y = 220 and Y = Rs. 1,100 crore. Check: Yd = 1,000, C = 50 + 800 = 850; 850 + 100 + 150 = 1,100. Ignoring the tax gives (50 + 250)/0.2 = 1,500.
Question 11
In a simple Keynesian model with lump-sum taxes, if government expenditure and taxes are both increased by Rs. 100 crore, national income will increase by:
- A) Zero, since the two effects cancel out
- B) Rs. 100 crore multiplied by 1/(1 - MPC)
- C) Rs. 100 crore multiplied by MPC/(1 - MPC)
- D) Rs. 100 crore, since the balanced budget multiplier is one
Show answer & explanation
Answer: D) Rs. 100 crore, since the balanced budget multiplier is one
The government expenditure multiplier is 1/(1 - MPC) and the lump-sum tax multiplier is -MPC/(1 - MPC). Their sum is (1 - MPC)/(1 - MPC) = 1. So equal increases in G and T raise income by the same amount: Rs. 100 crore. For example, with MPC = 0.8: 100 x 5 - 100 x 4 = 100.
Question 12
In an open economy, MPC = 0.8 and the marginal propensity to import = 0.05 (with no taxes). The open-economy multiplier is:
- A) 5
- B) 6.67
- C) 4
- D) 20
Show answer & explanation
Answer: C) 4
Open-economy multiplier = 1/(MPS + MPM) = 1/(0.2 + 0.05) = 1/0.25 = 4. Imports are a leakage, so the multiplier is smaller than the closed-economy value of 1/0.2 = 5. 20 is 1/MPM alone.
Question 13
In the two-sector Keynesian model, equilibrium income is attained where:
- A) Actual saving equals actual investment
- B) Planned saving equals planned investment
- C) Consumption equals income
- D) Government budget is balanced
Show answer & explanation
Answer: B) Planned saving equals planned investment
Equilibrium requires aggregate demand (C + I) to equal aggregate supply (C + S), i.e., planned (ex-ante) S = planned I. Actual (ex-post) saving always equals actual investment by accounting identity, including unplanned inventory changes, so it does not define equilibrium.
Question 14
An inflationary gap exists when:
- A) Aggregate demand falls short of aggregate supply at full employment
- B) Aggregate demand exceeds aggregate supply at the full-employment level of output
- C) Actual output exceeds potential output due to excess supply
- D) Investment exceeds saving at less than full employment
Show answer & explanation
Answer: B) Aggregate demand exceeds aggregate supply at the full-employment level of output
At full employment output cannot increase in the short run, so excess aggregate demand raises prices. The amount by which AD exceeds the level needed for full-employment equilibrium is the inflationary gap. A shortfall of AD is a deflationary gap.
Question 15
Disposable personal income is equal to:
- A) Personal income minus indirect taxes
- B) National income minus corporate taxes
- C) Personal income minus direct personal taxes and miscellaneous fees and fines paid by households
- D) Personal income plus transfer payments
Show answer & explanation
Answer: C) Personal income minus direct personal taxes and miscellaneous fees and fines paid by households
Personal income is income actually received by households, including transfers. Disposable personal income = personal income - personal direct taxes (and miscellaneous receipts of government such as fees and fines). It is available for consumption and saving. Indirect taxes are not deducted at this stage.