Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is $R s .50 c r o r e s$ , and MPS is $0.2$ and level of income (Y) is $R s .4000 c r o r e s$ . State whether the economy is in equilibrium or not (cite reasons).

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Solution

The aggregate demand (AD) function is given as: $A D = a + b (Y)$
Given,
$¯ a = 50$ ;
$b = M P C = 1 - M P S = 1 - 0.2 = 0.8$
$Y = 4, 000$

Inserting given values in AD function:
$A D = 50 + (0.8 \times 4, 000) = 3, 250$
$A D = R s .3, 250 c r o r e s$ .
$A S = Y = R s . 4, 000 c r o r e s$ .

Thus, $A D \neq A S$ , i.e, economy is not in equilibrium.

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Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is Rs.50crores, and MPS is 0.2 and level of income (Y) is Rs.4000crores. State whether the economy is in equilibrium or not (cite reasons).

The aggregate demand (AD) function is given as: AD=a+b(Y) Given,¯a=50;b=MPC=1−MPS=1−0.2=0.8Y=4,000Inserting given values in AD function:AD=50+(0.8×4,000)=3,250AD=Rs.3,250crores.AS=Y=Rs.4,000crores.Thus, AD≠AS, i.e, economy is not in equilibrium.

Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (A) is $R s .50 c r o r e s$ , and MPS is $0.2$ and level of income (Y) is $R s .4000 c r o r e s$ . State whether the economy is in equilibrium or not (cite reasons).