Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 4. Income Determination

Subject: Social Science - Class 12th

Q. No. 5 of Exercises

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5

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).

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.


5

More Exercise Questions

1

What is marginal propensity to consume? How is it related to marginal propensity to save?
2

What is the difference between ex ante investment and ex post investment?
3

What do you understand by ‘parametric shift of a line’? How does a line shift when its

(i) slope decreases, and (ii) its intercept increases?
4

What is ‘effective demand’? How will you derive the autonomous expenditure multiplier when price of final goods and the rate of interest are given?
5

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).
6

Explain ‘Paradox of Thrift’.