After analysing the data, state whether the economy is in equilibrium or not.
| National income | Rs 5000 crore |
| Marginal propensity to consume | 0.6 |
| Autonomous consumption and investment expenditure | Rs 500 crore |
Answer & explanation
Correct answer: option 2
The correct answer is option 2: The economy is not in equilibrium and AD needs to be more by 1,500 to be in equilibrium
To determine if the economy is in equilibrium, we need to compare aggregate demand (AD) and aggregate supply (AS).
At equilibrium,
AS=AD
Y= C+I
Given the information provided:
National income (Y) = Rs 5000 crore
Marginal propensity to consume (MPC) = 0.6
Autonomous consumption and investment expenditure (A) = Rs 500 crore
The consumption function is given as C = A + MPC * Y. Substituting the values:
C = 500 + 0.6 * 5000 = 500 + 3000 = 3500 crore
Thus AD= 3,500 Cr
Comparing AD and AS:
AS = Y = Rs 5000 crore AD = 3500 crore
We can see that AD is less than AS (by Rs 1,500 Cr), indicating that the economy is not in equilibrium.
Option 2 is correct: The economy is not in equilibrium and AD needs to be more by 1,500 to be in equilibrium