The aggregate demand line of a two-sector economy cuts the vertical axis at Rs 120 crore. At an income of Rs 400 crore, the line is at a height of Rs 440 crore. What are the equilibrium income and the investment multiplier of this economy?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 600 crore; 5
The AD line is AD = Ā + cY. Its vertical intercept is autonomous expenditure, and its slope is c.
Given:
Intercept, Ā = Rs 120 crore
At Y = 400, AD = 440
\( \displaystyle c = \frac{440 - 120}{400} = \frac{320}{400} = 0.8 \)
\( \displaystyle Y^{*} = \frac{\bar{A}}{1 - c} = \frac{120}{0.2} = 600 \)
\( \displaystyle k = \frac{1}{1 - c} = \frac{1}{0.2} = 5 \)
Equilibrium income is Rs 600 crore and the multiplier is 5.
Option (3) Rs 600 crore; 1.25 — 1.25 is 1 ÷ c, not 1 ÷ (1 − c).
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. …” “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.” “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
|
