Question

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

Answer 1

MPC=1-MPS=1-0.2
MPC=0.8
Y=400 crores
`AD=C+bar(I)=bar(C )+bY+bar(I)`
`AD=bar(A)+bY "where", bar(A)=bar(C )=bar(I)`
`=50+(0.8)(4000)=3250"crore"`
AS or Y=4000
Here, ` 3250 lt 4000 or AD lt AS`
Hence, aggregate demand is less than aggregate supply. Hence, the economy is not in equilibrium.