Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4,000 crores. State whether the economy is in equilibrium or not (cite reasons).

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Solution

Aggregate demand is given as

$A D = ¯ A + c (y)$

$¯ A = 50, MPC (c) = 1 - MPS = 1 - 0.2 = 0.8$

After substituting with values,

$A D = 50 + 0.8 \times 4, 000 = 3, 250 crores$

AD of Rs 3,250 crores is less than Y(income) of Rs 4,000 crores.

Hence, the economy is not at equilibrium.

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Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4,000 crores. State whether the economy is in equilibrium or not (cite reasons).

Aggregate demand is given as AD=¯A+c(y) ¯A=50,MPC (c)=1−MPS=1−0.2=0.8 After substituting with values, AD=50+0.8×4,000=3,250 crores AD of Rs 3,250 crores is less than Y(income) of Rs 4,000 crores. Hence, the economy is not at equilibrium.

Aggregate demand is given as

$A D = ¯ A + c (y)$

$¯ A = 50, MPC (c) = 1 - MPS = 1 - 0.2 = 0.8$

After substituting with values,

$A D = 50 + 0.8 \times 4, 000 = 3, 250 crores$

AD of Rs 3,250 crores is less than Y(income) of Rs 4,000 crores.

Hence, the economy is not at equilibrium.