Consider the following statements about the model of income determination:
(A) Ex ante supply is equal to ex ante demand only when the final goods market is in equilibrium.
(B) A depletion of inventory is positive inventory investment.
(C) C̄ remains more or less stable over time, while Ī undergoes periodic fluctuations.
(D) An increase in the mps increases the slope of the aggregate demand line.
(E) The total autonomous expenditure in the economy is the sum of C̄ and Ī.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (C) and (E) only
(A) Ex ante supply is equal to ex ante demand only when the final goods market is in equilibrium. — Correct. Planned supply and planned demand match only at equilibrium.
(B) A depletion of inventory is positive inventory investment. — Incorrect. A depletion of inventory is negative inventory investment.
(C) C̄ remains more or less stable over time, while Ī undergoes periodic fluctuations. — Correct. Autonomous consumption is fairly steady, while investment rises and falls from time to time.
(D) An increase in the mps increases the slope of the aggregate demand line. — Incorrect. A rise in the mps lowers the mpc, so it reduces the slope of AD.
(E) The total autonomous expenditure in the economy is the sum of C̄ and Ī. — Correct. A is the autonomous part of demand: autonomous consumption plus autonomous investment.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … This equation can be further simplified by adding up the two autonomous terms, C̄ and Ī, making it Y = Ā + c.Y where Ā = C̄ + Ī is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. C̄, representing subsistence consumption level of an economy, remains more or less stable over time. However, Ī has been observed to undergo periodic fluctuations. …” “4.2 Determination of Income in Two-sector Model … Ex ante supply is equal to ex ante demand only when the final goods market, and hence the economy, is in equilibrium. …” “4.2 Determination of Income in Two-sector Model … It should be noted that inventories or stocks refers to that part of output produced which is not sold and therefore remains with the firm. Change in inventory is called inventory investment. It can be negative as well as positive: if there is a rise in inventory, it is positive inventory investment, while a depletion of inventory is negative inventory investment.” “Paradox of Thrift … When A changes the line shifts upwards or downwards in parallel. When c changes, however, the line swings up or down. An increase in mps, or a decline in mpc, reduces the slope of the AD line and it swings downwards. We depict the situation in Fig. 4.8.” |