In an economy, C = 50 + 0.6Y and autonomous investment is 70. Consider the following statements:
(A) The aggregate demand line cuts the vertical axis at 120.
(B) The slope of the aggregate demand line is 0.6.
(C) At an income of 400, there is excess demand in the economy.
(D) At an income of 400, aggregate demand is 360.
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), (B) and (D) only
AD = C̄ + Ī + cY = 50 + 70 + 0.6Y = 120 + 0.6Y.
(A) The aggregate demand line cuts the vertical axis at 120. — Correct. At Y = 0, AD = C̄ + Ī = 120.
(B) The slope of the aggregate demand line is 0.6. — Correct. AD is parallel to the consumption function, so its slope is c = 0.6.
(C) At an income of 400, there is excess demand in the economy. — Incorrect. At Y = 400, AD = 360, which is less than output: this is excess supply.
(D) At an income of 400, aggregate demand is 360. — Correct. 120 + 0.6 × 400 = 360.
NCERT (2026-27): “Aggregate Demand: Graphical Representation The Aggregate Demand function shows the total demand (made up of consumption + investment) at each level of income. Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function. … The aggregate demand function is parallel to the consumption function i.e., they have the same slope c. It may be noted that this function shows ex ante demand.” “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. …” |