Suppose autonomous investment and consumption expenditure (A) in a hypothetical economy is ₹50 crores, MPS is 0.2 and the level of income is ₹4000 crores. The value of ex-ante aggregate demand would be................
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 3250
To calculate the ex-ante aggregate demand (AD), we use the formula: AD=A+ cY
Where:
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A = Autonomous expenditure (investment + autonomous consumption) = ₹50 crores
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Y = Income = ₹4000 crores
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c = Marginal Propensity to Consume (MPC)
MPC=1−MPS = 1−0.2=0.8
AD=50 + 0.8 × 4000= ₹3250 crores