In an economy, the full employment level of output is Rs 1,000 crore, C = 50 + 0.8Y and autonomous investment is Rs 100 crore. Which of the following is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Equilibrium output is Rs 750 crore, a case of deficient demand; autonomous spending must rise by Rs 50 crore to reach full employment output.
Given:
Full employment output = Rs 1,000 crore
C = 50 + 0.8Y
I = Rs 100 crore
Equilibrium output:
\( \displaystyle Y = \frac{50 + 100}{1 - 0.8} = 750 \)
This is below the full employment output of 1,000, so demand is not enough: deficient demand. To close the gap of 250, autonomous spending must rise by the gap divided by the multiplier (5):
\( \displaystyle \Delta A = \frac{250}{5} = 50 \)
Option (1) Equilibrium output is Rs 1,000 crore, because equilibrium is always reached at full employment. — Incorrect. Equilibrium need not be at full employment; here it is 750.
Option (2) Equilibrium output is Rs 750 crore, a case of excess demand; autonomous spending must fall by Rs 50 crore. — Incorrect. Output below full employment is deficient demand, not excess demand.
Option (3) Equilibrium output is Rs 750 crore, a case of deficient demand; autonomous spending must rise by Rs 250 crore to reach full employment output. — Incorrect. 250 is the output gap. Through the multiplier, a rise of only 50 in autonomous spending closes it.
Option (4) Equilibrium output is Rs 750 crore, a case of deficient demand; autonomous spending must rise by Rs 50 crore to reach full employment output. — Correct. Output 750, deficient demand, and a rise of 50 in autonomous spending.
NCERT (2026-27): “4.4 Some More Concepts … 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 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 rise in prices in the long run.”
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