In the diagram of the two-sector model, the aggregate demand line (0 < c < 1) cuts the 45° line at the equilibrium point E. Consider the following statements:
(A) At E, aggregate demand is less than output.
(B) At incomes below the equilibrium income, there is an excess supply of output.
(C) At incomes above the equilibrium income, unsold stocks pile up in the warehouses.
(D) At E, ex ante aggregate demand equals ex ante aggregate supply.
(E) At incomes above the equilibrium income, the aggregate demand line lies below the 45° line.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (C), (D) and (E) only
The AD line is flatter than the 45° line (slope c < 1). So it lies above the 45° line to the left of E and below it to the right.
(A) At E, aggregate demand is less than output. — Incorrect. At E, AD equals output.
(B) At incomes below the equilibrium income, there is an excess supply of output. — Incorrect. Below equilibrium income, AD is above output: there is excess demand.
(C) At incomes above the equilibrium income, unsold stocks pile up in the warehouses. — Correct. Above equilibrium income, demand falls short of output, so stocks pile up.
(D) At E, ex ante aggregate demand equals ex ante aggregate supply. — Correct. This is the equilibrium condition.
(E) At incomes above the equilibrium income, the aggregate demand line lies below the 45° line. — Correct. The flatter AD line falls below the 45° line after E.
NCERT (2026-27): “Equilibrium Equilibrium is shown graphically by putting ex ante aggregate demand and supply together in a diagram (Fig. 4.6). The point where ex ante aggregate demand is equal to ex ante aggregate supply will be equilibrium.” “4.2 Determination of Income in Two-sector Model … 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. Stocks will be piling up in the warehouses which we may consider as unintended accumulation of inventories. …” |