In an economy with an mpc of 0.75, firms cut their autonomous investm…

The correct answer is Option (2) → AD line shifts down in parallel → excess supply of Rs 40 crore at the old output → unsold stocks pile up → income falls by Rs 160 crore over the rounds

Autonomous investment is part of A, so a fall in it shifts AD down in parallel. At the old output, demand is now Rs 40 crore short: excess supply. Stocks pile up, producers cut output, and income falls round after round:

    \( \displaystyle \Delta Y = \frac{-40}{1 - 0.75} = -160 \)

Option (1) AD line swings down and becomes flatter → excess supply of Rs 40 crore at the old output → unsold stocks pile up → income falls by Rs 160 crore over the rounds — Incorrect. Only a change in the MPC makes the AD line swing; a change in investment shifts it in parallel.

Option (2) AD line shifts down in parallel → excess supply of Rs 40 crore at the old output → unsold stocks pile up → income falls by Rs 160 crore over the rounds — Correct. Parallel shift, excess supply, unsold stocks, and a fall of 4 × 40 = Rs 160 crore.

Option (3) AD line shifts down in parallel → excess supply of Rs 40 crore at the old output → unsold stocks pile up → income falls by Rs 40 crore — Incorrect. Income falls by a multiple of the fall in investment, not by Rs 40 crore only.

Option (4) AD line shifts down in parallel → excess demand of Rs 40 crore at the old output → stocks run down → income falls by Rs 160 crore over the rounds — Incorrect. A fall in demand creates excess supply, not excess demand.