An economy has autonomous expenditure (A) of Rs 40 crore, an MPS of 0.25 and an income of Rs 2,000 crore.
Statement I: Ex ante aggregate demand is Rs 1,540 crore.
Statement II: The economy is in equilibrium at this income.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
MPS = 0.25, so c = 0.75.
\( AD = 40 + 0.75 \times 2{,}000 = 1{,}540 \)
Statement I: Ex ante aggregate demand is Rs 1,540 crore. — Correct. AD = A + cY = 1,540.
Statement II: The economy is in equilibrium at this income. — Incorrect. Planned demand (1,540) is less than output (2,000), so ex ante AD is not equal to ex ante supply. Equilibrium income is 40 / 0.25 = 160.
NCERT (2026-27): “Equilibrium Equilibrium is shown graphically by putting ex ante aggregate demand and supply together in a diagram (Fig. 4.6). The point where ex ante aggregate demand is equal to ex ante aggregate supply will be equilibrium.” “4.2 Determination of Income in Two-sector Model … If ex ante demand for final goods falls short of the output of final goods that the producers have planned to produce in a given year, equation (4.3) will not hold. Stocks will be piling up in the warehouses which we may consider as unintended accumulation of inventories. …” |