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

Consumption expenditure (A) = Rs 50Crores
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 x 4000
= 50 + 3200
= Rs 3250 Crores
But, Rs 3250 < Rs 4000
Implies that AD < Y
Hence, the economy is not in equilibrium.