Estimate the value of incremental investment if, equilibrium level of income increases by ₹ 50,000 crore and h

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Q. Estimate the value of incremental investment if, equilibrium level of income increases by ₹ 50,000 crore and half of additional income is always saved in the economy.

Arunachal CbseCBSE Class XII Board 2026Subjective· 4mImportance★★★★★

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Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

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When half of additional income is saved, the multiplier is 2. An equilibrium income rise of ₹ 50,000 crore therefore requires an incremental investment of ₹ 25,000 crore.

The question asks us to work backward from an observed change in equilibrium income to the autonomous investment that triggered it. This is the reverse of the usual multiplier story: instead of "given $\Delta I$ , find $\Delta Y$ ," we now have "given $\Delta Y$ , find $\Delta I$ ."

The key relationship is the Keynesian multiplier mechanism. When autonomous spending (investment, in this case) increases, it sets off a chain of income creation. The initial spending becomes someone's income, part of which is consumed (creating further income), part saved (leaking out of the circular flow). The process continues until the cumulative increase in income is a multiple of the original injection. The size of that multiple depends on the marginal propensity to consume (MPC) or equivalently the marginal propensity to save (MPS).

We are told that half of additional income is always saved. That means the marginal propensity to save is $\text{MPS} = 0.5$ , and by definition $\text{MPC} = 1 - \text{MPS} = 0.5$ as well. The multiplier formula is:

k = \frac{1}{\text{MPS}} = \frac{1}{1 - \text{MPC}}

Substituting $\text{MPS} = 0.5$ :

k = \frac{1}{0.5} = 2

The relationship between the change in equilibrium income ( $\Delta Y$ ) and the change in autonomous investment ( $\Delta I$ ) is: …

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Q.Estimate the value of incremental investment if, equilibrium level of income increases by ₹ 50,000 crore and half of additional income is always saved in the economy.

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