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 4000 crores. State whether the economy is in equilibrium or not (cite reasons).

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Solution

Consumption expenditure (A) = Rs 50 Crores

MPS = 0.2

So, MPC = 1 − MPS

= 1 − 0.2

= 0.8

Y = 4000 Crores

We know that AD = A + cY (1)

Putting the values in equation (1)

AD = 50 + 0.8 × 4000

= 50 + 3200

= Rs 3250 Crores

But, Rs 3250 < Rs 4000

Implies that AD < Y

Hence, the economy is not in equilibrium.

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