In the two-sector model, the equation Y = A + cY (equation 4.3) holds:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → only when the final goods market is in equilibrium

In Y = A + cY, the left side is planned supply and the right side is planned demand. The two are equal only when the final goods market is in equilibrium.

Option (1) only when the economy is at the full employment level of income — Incorrect. Equilibrium can come at any level of income, even with unemployment. It need not be full employment.

Option (2) only when the final goods market is in equilibrium — Correct. Ex ante supply equals ex ante demand only in equilibrium.

Option (3) at every level of output, because it is an accounting identity — Incorrect. The accounting identity is about ex post values. Equation (4.3) is about planned values, so it is not an identity.

Option (4) only when planned investment in the economy is zero — Incorrect. Planned investment is a part of A. The equation does not need it to be zero.

NCERT (2026-27): “4.2 Determination of Income in Two-sector Model … A word of caution is in order. The term Y on the left hand side of equation (4.3) represents the ex ante output or the planned supply of final goods. On the other hand, the expression on the right hand side denotes ex ante or planned aggregate demand for final goods in the economy. Ex ante supply is equal to ex ante demand only when the final goods market, and hence the economy, is in equilibrium. Equation (4.3) should not, therefore, be confused with the accounting identity of Chapter 2, which states that the ex post value of total output must always be equal to the sum total of ex post consumption and ex post investment in the economy. …”