With reference to the components of Aggregate Demand (AD) in a two-sector economy, consider the following statements: 1. It consists of consumption expenditure and investment expenditure. 2. Investment expenditure is assumed to be completely induced by income levels in the simplified model. 3. Consumption expenditure includes both autonomous and induced components. Which of the statements given above is/are correct?

Correct Option The correct option is 1 and 3 only. Explanation In macroeconomics, a two-sector economy is a simplified model consisting only of households and firms. There is no government sector or foreign trade. In this framework, Aggregate Demand (AD) represents the total demand for final goods and services in the economy at a given price level. Statement-wise Analysis - Statement 1 is Correct. In a two-sector economy, Aggregate Demand is the sum of consumption expenditure by households and investment expenditure by firms. Mathematically, it is expressed as AD = C + I, where 'C' stands for Consumption and 'I' stands for Investment. - Statement 2 is Incorrect. In the simplified Keynesian model of income determination, investment expenditure is generally assumed to be autonomous. This means it is independent of the current level of income ($Y$) and is determined by exogenous factors such as business expectations and interest rates. It is denoted as $\bar{I}$. While investment can be induced by income in more complex models, the standard simplified two-sector model assumes it is constant relative to income. - Statement 3 is Correct. The consumption function is represented as $C = \bar{C} + cY$. This equation highlights two components: 1. Autonomous Consumption ($\bar{C}$): The minimum level of consumption required for survival, which occurs even when income is zero (financed through past savings or borrowing). 2. Induced Consumption ($cY$): The portion of consumption that depends on the level of income, determined by the Marginal Propensity to Consume ($c$). Key Takeaway Aggregate Demand in a two-sector model is the sum of Consumption ($C$) and Investment ($I$). While Consumption has both autonomous and income-induced components, Investment is typically treated as autonomous (independent of income) in the simplified determination of income model.

NCERT Class 12 Economics — Chapter 6: Determination of Income and Employment

mcqmedium

With reference to the components of Aggregate Demand (AD) in a two-sector economy, consider the following statements:

It consists of consumption expenditure and investment expenditure.
Investment expenditure is assumed to be completely induced by income levels in the simplified model.
Consumption expenditure includes both autonomous and induced components.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1, 2 and 3
B1 and 2 only
C2 only
D1 and 3 only

Did you get this right?

Solution

Correct Option

The correct option is 1 and 3 only.

Explanation

In macroeconomics, a two-sector economy is a simplified model consisting only of households and firms. There is no government sector or foreign trade. In this framework, Aggregate Demand (AD) represents the total demand for final goods and services in the economy at a given price level.

Statement-wise Analysis

Statement 1 is Correct.
In a two-sector economy, Aggregate Demand is the sum of consumption expenditure by households and investment expenditure by firms. Mathematically, it is expressed as AD = C + I, where 'C' stands for Consumption and 'I' stands for Investment.
Statement 2 is Incorrect.
In the simplified Keynesian model of income determination, investment expenditure is generally assumed to be autonomous. This means it is independent of the current level of income ($Y$) and is determined by exogenous factors such as business expectations and interest rates. It is denoted as $\bar{I}$. While investment can be induced by income in more complex models, the standard simplified two-sector model assumes it is constant relative to income.
Statement 3 is Correct.
The consumption function is represented as $C = \bar{C} + cY$. This equation highlights two components:
1. Autonomous Consumption ($\bar{C}$): The minimum level of consumption required for survival, which occurs even when income is zero (financed through past savings or borrowing).
2. Induced Consumption ($cY$): The portion of consumption that depends on the level of income, determined by the Marginal Propensity to Consume ($c$).

Key Takeaway

Aggregate Demand in a two-sector model is the sum of Consumption ($C$) and Investment ($I$). While Consumption has both autonomous and income-induced components, Investment is typically treated as autonomous (independent of income) in the simplified determination of income model.

Your note

More from Chapter 6: Determination of Income and Employment

With reference to the government sector in the determination of income, consider the following statements: 1. Government expenditure adds to the aggregate demand similar to investment and consumption. 2. Taxes imposed by the government increase the disposable income of households. 3. In the absence of indirect taxes, the GDP is identically equal to the National Income. Which of the statements given above is/are correct?

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Match List I with List II and select the correct answer using the code given below: List I | List II A. Excess Demand | 1. Amplifies changes in autonomous expenditure B. Deficient Demand | 2. Leads to a decline in prices in the long run C. Multiplier | 3. Signals that supply exceeds demand D. Inventory Accumulation | 4. Leads to a rise in prices in the long run

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Consider the following statements regarding Savings in an economy: 1. Savings is defined as the portion of income that is used for tax payments. 2. The Marginal Propensity to Save (MPS) is the change in savings per unit change in income. 3. If the Marginal Propensity to Consume (MPC) is 1, the Marginal Propensity to Save (MPS) will be 0. Which of the statements given above is/are correct?

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What does "Negative Inventory Investment" signify in an economy? 1. A rise in the stock of finished goods. 2. A depletion of existing stock to meet excess demand. 3. A situation where planned sales are less than actual sales. Which of the statements given above is/are correct?

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With reference to the consumption function in an economy, consider the following statements: 1. Autonomous consumption is the consumption expenditure that occurs only when income is positive. 2. Induced consumption is the portion of consumption that varies directly with the level of income. 3. The marginal propensity to consume determines the rate at which induced consumption changes as income changes. Which of the statements given above is/are correct?

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Correct Option

The correct option is 1 and 3 only.

Explanation

Statement-wise Analysis

Statement 1 is Correct.
In a two-sector economy, Aggregate Demand is the sum of consumption expenditure by households and investment expenditure by firms. Mathematically, it is expressed as AD = C + I, where 'C' stands for Consumption and 'I' stands for Investment.
Statement 2 is Incorrect.
In the simplified Keynesian model of income determination, investment expenditure is generally assumed to be autonomous. This means it is independent of the current level of income ($Y$) and is determined by exogenous factors such as business expectations and interest rates. It is denoted as $\bar{I}$. While investment can be induced by income in more complex models, the standard simplified two-sector model assumes it is constant relative to income.
Statement 3 is Correct.
The consumption function is represented as $C = \bar{C} + cY$. This equation highlights two components:
1. Autonomous Consumption ($\bar{C}$): The minimum level of consumption required for survival, which occurs even when income is zero (financed through past savings or borrowing).
2. Induced Consumption ($cY$): The portion of consumption that depends on the level of income, determined by the Marginal Propensity to Consume ($c$).