Question

Measure the level of ex-ante aggregate demand when autonomous investment and consumption expenditure (1) is Rs 50 crores, MPS is 0.2 and the level of income (Y) is Rs 4000 crores.

Options

• 3250 Crores

• 3350 Crores

• 3450 Crores

• 3550 Crores

Answer 1

3250 Crores

Explanation:

Consumption expenditure (1) = Rs 50 Crores

MPS = 0.2

So, MPC = 1 − MPS

= 1 − 0.2

= 0.8

Y = 4000 Crores

We know that AD = A+ cY (1)

Using equations to represent the values (1)

AD = 50 + 0.8 x× 4000

= 50 + 3200

= Rs 3250 Crores

But, Rs 3250 < Rs 4000

Implies that AD < Y

As a result, the economy is out of balance.