Consider the following statements about the two-sector model:
(A) In an economy without a government, ex ante aggregate demand is the sum of ex ante consumption and ex ante investment expenditure.
(B) In the equation Y = A + cY, the term Y on the left-hand side stands for the ex post output of final goods.
(C) C̄, representing the subsistence consumption level, remains more or less stable over time.
(D) Total autonomous expenditure A is the sum of C̄ and Ī.
(E) Ī remains more or less stable over time, while C̄ undergoes periodic fluctuations.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (C) and (D) only
(A) In an economy without a government, ex ante aggregate demand is the sum of ex ante consumption and ex ante investment expenditure. — Correct. Without a government, households consume and firms invest, so AD = C + I.
(B) In the equation Y = A + cY, the term Y on the left-hand side stands for the ex post output of final goods. — Incorrect. Y on the left-hand side is the ex ante (planned) output, not the ex post output.
(C) C̄, representing the subsistence consumption level, remains more or less stable over time. — Correct. Subsistence consumption hardly changes over time.
(D) Total autonomous expenditure A is the sum of C̄ and Ī. — Correct. A = C̄ + Ī is the total autonomous expenditure.
(E) Ī remains more or less stable over time, while C̄ undergoes periodic fluctuations. — Incorrect. It is the other way round: C̄ is stable and Ī fluctuates.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model In an economy without a government, the ex ante aggregate demand for final goods is the sum total of the ex ante consumption expenditure and ex ante investment expenditure on such goods, viz. AD = C + I. …” “4.2 Determination of Income in Two-sector Model … This equation can be further simplified by adding up the two autonomous terms, C̄ and Ī, making it Y = Ā + c.Y where Ā = C̄ + Ī is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. C̄, representing subsistence consumption level of an economy, remains more or less stable over time. However, Ī has been observed to undergo periodic fluctuations. …” “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. …” |