Aggregate Demand and its components
The theory of income determination as given by John Maynard Keynes is based on the assumption that all the variables in the theory are Ex-ante. The theory of income determination is based on the analysis of Aggregate Demand and Aggregate Supply. The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Even if income is zero, there is some consumption. This level of consumption is independent of income. There is another component of the consumption function which depends on the marginal propensity to consume (MPC) and hence is a dependent variable. While the average propensity to consume (APC) is the consumption per unit of income, the marginal propensity to consume is the rate of change in consumption due to income change.
The other part of the household income is savings. It is that part of the income which is not consumed. The average propensity to save (APS) is savings per unit of income. APS can be negative. It is when there is some consumption even at zero level of income or till that level of income, where consumption is greater than Income.
Ex-ante variables are the variables which are :
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Planned
When we speak of consumption or investment, we may mean what people plan to do or what actually happens, and the two often differ. Values in the first sense are ex ante, the planned values; values in the second are ex post:
Ex ante: the planned values, what people intend to consume or invest. A producer who plans to add Rs 100 of goods to the stock has an ex ante investment of Rs 100.
Ex post: the actual or accounting values, as they turn out in a year. If unexpected sales leave the stock only Rs 70 higher, the producer’s ex post investment is Rs 70.
The theory of income determination works with ex ante values, because output is decided by the plans of buyers and producers.
Why the other options are incorrect
Option (2) Actual — Incorrect. Actual or accounting values are ex post values, what has really happened, and not ex ante ones.
Option (3) Related — Incorrect. There is no such meaning of ex ante.
Option (4) Unrelated — Incorrect. There is no such meaning of ex ante.
Note: The passage comes from the chapter ‘Determination of Income and Employment’ of the NCERT book Introductory Macroeconomics. The five answers in this set all rest on the definitions at the start of that chapter, so go through them line by line.
NCERT (2025-26): “4.1 Aggregate Demand and Its Components … We call these actual or accounting values ex post measures of these items. These terms, however, can be used with a different connotation. Consumption may denote not what people have actually consumed in a given year, but what they had planned to consume during the same period. Similarly, investment can mean the amount a producer plans to add to her inventory. It may be different from what she ends up doing. Suppose the producer plans to add Rs 100 worth goods to her stock by the end of the year. Her planned investment is, therefore, Rs 100 in that year. However, due to an unforeseen upsurge of demand for her goods in the market the volume of her sales exceeds what she had planned to sell and, to meet this extra demand, she has to sell goods worth Rs 30 from her stock. Therefore, at the end of the year, her inventory goes up by Rs (100 – 30) = Rs 70 only. Her planned investment is Rs 100 whereas her actual, or ex post, investment is Rs 70 only. We call the planned values of the variables – consumption, investment or output of final goods – their ex ante measures. In simple words, ex-ante depicts what has been planned, and ex-post depicts what has actually happened.…” |