In a two-sector economy with a fixed price level, the aggregate demand line cuts the 45° line at an income of Rs 800 crore. At an income of Rs 1,000 crore, the aggregate demand line is at a height of Rs 900 crore. Which of the following is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → At Rs 1,000 crore, unintended inventories of Rs 100 crore pile up, and the MPC is 0.5.
Given:
AD cuts the 45° line at Y = Rs 800 crore
At Y = Rs 1,000 crore, AD = Rs 900 crore
Supply is read on the 45° line, so at Y = 1,000 supply is 1,000. Demand there is only 900, so unsold goods of Rs 100 crore pile up as unintended inventories.
AD meets the 45° line at 800, so AD = 800 when Y = 800. The slope of AD is the MPC:
\( \displaystyle c = \frac{900 - 800}{1{,}000 - 800} = \frac{100}{200} = 0.5 \)
Option (1) At Rs 1,000 crore, unintended inventories of Rs 200 crore pile up, and the MPC is 0.5. — Incorrect. The gap is 1,000 − 900 = Rs 100 crore, not Rs 200 crore.
Option (2) At Rs 1,000 crore, inventories run down by Rs 100 crore, and the MPC is 0.5. — Incorrect. Demand is less than output, so stocks pile up; they do not run down.
Option (3) At Rs 1,000 crore, unintended inventories of Rs 100 crore pile up, and the MPC is 0.9. — Incorrect. 0.9 is AD / Y at one point. The MPC is the slope of AD, which is 0.5.
Option (4) At Rs 1,000 crore, unintended inventories of Rs 100 crore pile up, and the MPC is 0.5. — Correct. Excess supply is Rs 100 crore, and the slope of AD is 0.5.
NCERT (2026-27): “Supply Side of Macroeconomic Equilibrium … In the first stage of macroeconomic theory, we are taking the price level as fixed. Here, aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all types available. Whatever is the level of GDP, that much will be supplied and price level has no role to play. This kind of supply situation is shown by a 45° line. Now, the 45° line has the feature that every point on it has the same horizontal and vertical coordinates.” “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. …” “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.” |