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).
Given: Autonomous Investment and Consumption Expenditure (A) = Rs 50 crores MPS = 0.2 Level of Income (Y) = Rs 4000 crores
Step 1: Calculate MPC Since MPS + MPC = 1 MPC = 1 - MPS = 1 - 0.2 = 0.8
Step 2: Calculate Ex-ante Aggregate Demand Ex-ante Aggregate Demand = A + cY = 50 + () = 50 + 3200 = Rs 3250 crores
Step 3: Compare with Aggregate Supply Ex-ante Aggregate Supply = Y = Rs 4000 crores
Conclusion: The economy is not in equilibrium. This is because ex-ante aggregate demand (Rs 3250 crores) is not equal to ex-ante aggregate supply (Rs 4000 crores). For equilibrium, the plans of suppliers must be matched by plans of those who provide final demands, i.e., ex-ante aggregate demand must equal ex-ante aggregate supply. Since AD < AS, there is excess supply in the economy.
Explanation
The question tests understanding of ex-ante aggregate demand calculation and equilibrium condition. The formula AD = A + cY is derived from the context where aggregate demand consists of autonomous expenditure plus induced consumption (cY). Equilibrium requires AD = Y as stated in the algebraic method section. Since calculated AD (3250 crores) is less than income level (4000 crores), the economy faces excess supply and is not in equilibrium.
Solution Steps
Step 1: Calculate MPC using MPS + MPC = 1, so MPC = 1 - 0.2 = 0.8
Step 2: Apply formula Ex-ante AD = A + cY = 50 + () = 50 + 3200 = 3250 crores
Step 3: Compare AD (3250 crores) with AS/Y (4000 crores) - they are unequal
Step 4: Conclude economy is not in equilibrium because AD AS