In an economy, C = 100 + 0.75Y and autonomous investment is Rs 50 crore (all figures in Rs crore). Consider the following statements:
(A) The equilibrium income is Rs 600 crore.
(B) At an income of Rs 800 crore, unplanned inventories rise by Rs 50 crore.
(C) At an income of Rs 400 crore, there is an excess supply of Rs 50 crore.
(D) At the equilibrium income, consumption is Rs 450 crore.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (B) only
Aggregate demand here is AD = 100 + 0.75Y + 50. Equilibrium is where output equals AD. Where output is more than AD, the unsold goods pile up as unplanned inventories; where output is less, there is excess demand.
(A) The equilibrium income is Rs 600 crore. — Correct. Y = 150 ÷ (1 − 0.75) = 150 ÷ 0.25 = 600.
(B) At an income of Rs 800 crore, unplanned inventories rise by Rs 50 crore. — Correct. AD at 800 = 100 + 600 + 50 = 750. Output is 50 more than AD, so Rs 50 crore stays unsold.
(C) At an income of Rs 400 crore, there is an excess supply of Rs 50 crore. — Incorrect. AD at 400 = 100 + 300 + 50 = 450, which is more than output. This is an excess demand of Rs 50 crore.
(D) At the equilibrium income, consumption is Rs 450 crore. — Incorrect. C = 100 + 0.75 × 600 = 550. 450 is only the induced part, 0.75 × 600.
NCERT (2026-27): “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. 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. Stocks will be piling up in the warehouses which we may consider as unintended accumulation of inventories. …” |