Macro

Income & Employment

Medium

Read the following report carefully and answer the questions on the basis of the same:

Along with the weakening of global economic activity, inflation the world over also remained muted in 2019. Inflation softened in advanced and emerging economies reflecting a slack in consumer demand. From the supply side, lower energy prices in 2019 also contributed to softening of inflation. In India, inflation rose slightly to 4.1% in April - December 2019, after a sharp decline from 5.9% in 2014 to 3.4% in 2018.

The impact of the above situation under the Keynesian theory of income and employment in an economy is?

Decrease in income, output and employment.

Decrease in nominal income, but no change in real output.

Increase in income, output and employment.

No change in output or employment but increase in general price level.

✅ Correct Option: 1

The correct option is:

Decrease in income, output and employment.

Explanation based on the report and Keynesian Theory:

The Situation Described: The report highlights a global weakening of economic activity and a slack in consumer demand (a reduction in aggregate demand), leading to muted and softening inflation.
Keynesian Application: According to Keynesian theory, in the short run, the levels of national income, output, and employment are strictly determined by the level of Aggregate Demand (AD).

When consumer demand slacks (AD shifts to the left), firms face involuntary inventory accumulation.
To adapt, producers cut down on production, which directly leads to a decrease in output and real income.
As production falls, firms lay off workers, causing a decrease in employment.

2025: 3 June Shift 1

Due to weakening of global economic activity, level of aggregate demand ___________ in the economy.

2023: 28 May Shift 2

Given AD = C + I + CY, change in autonomous consumption will lead to :

(A) Change in equilibrium level of income

(B) Change in aggregate demand

(D) Change in aggregate demand and no change in equilibrium level of income

(E) Change in marginal propensity to consume

Choose the correct answer from the options given below :

2026: 12 May Shift 1

An increase in government spending will lead to _________

2025: 28 May Shift 2

Arrange the following statement in the context of the effect of an autonomous change in aggregate demand on income and output.

(A) When autonomous investment increases, the aggregate demand shifts in parallel upwards.

(B) Equilibrium level of income depends on aggregate demand.

(D) The output will be greater than the original output.

Choose the correct answer from the options given below:

2022: 15 July Shift 2

The size of investment multiplier (k) depends on:-

2026: 19 May Shift 2

When income rises by Rs.10, then induced consumption will rises by?

The impact of the above situation under the Keynesian theory of income and employment in an economy is?

Solution

Explanation based on the report and Keynesian Theory:

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