Assertion (A): The equation Y = A + cY of the two-sector model holds at every level of output, like the accounting identity of national income.
Reason (R): Ex ante supply is equal to ex ante demand only when the final goods market is in equilibrium.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) is false but (R) is true.
Assertion (A): The equation Y = A + cY of the two-sector model holds at every level of output, like the accounting identity of national income. — False. Y = A + cY says that planned output equals planned demand. It holds only at equilibrium. The accounting identity is about ex post values, which are always equal.
Reason (R): Ex ante supply is equal to ex ante demand only when the final goods market is in equilibrium. — True. Planned supply and planned demand are equal only when the final goods market is in equilibrium.
R itself shows why A is wrong: the equation is an equilibrium condition, not an identity.
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. 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. …” |