Question

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).

Answer 1

Answer:

MPC = 1 – MPS

= 1 – 0.2

= 0.8

Y = 4000 crores

AD = C + I

= C0 + CY + I

= C0 + I + CY

AD = A + CY (Where, A = C0 + I)

= 50 + 0.8 (4000)

= 3250cr

AS (Y) = 4000cr

Here aggregate demand is less than aggregate supply so the economy is not in equilibrium this means that the buyers are planning to buy less than what the sellers are planning to produce and sell, due to this the inventories will accumulate. So the producers will reduce the production level and workers will be laid off.