Suppose in an economy, planned spendings are greater than planned outputs. Identify the correct option with re

Question 92 of 104

Q. Suppose in an economy, planned spendings are greater than planned outputs. Identify the correct option with respect to effects on the economy :

(i) Decrease in planned inventories in the economy

(ii) Rise in National Income

(iii) Decrease in real output level in the economy

(iv) Decrease in employment level in the economy Options : (A) Only

(i) (B)

(i) and

(ii) (C)

(iii) and

(iv) (D) (ii),

(iii) and (iv)

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Concept understanding — Ex Ante Ex Post

Ex Ante and Ex Post: Planned vs. Actual

The Everyday Intuition

Think about planning a picnic. You check the weather forecast, pack sandwiches, and expect five friends to show up. That's your plan — what you intend to happen. Now imagine the actual day: it rains, only three friends come, and you end up eating soggy sandwiches alone. What actually happened is different from what you planned.

That's the entire idea of Ex Ante and Ex Post in one story.

Ex Ante (Latin: "before the event") = planned, intended, or anticipated values.
Ex Post (Latin: "after the event") = actual, realised, or observed values.

In economics, this distinction is crucial because what people plan to do and what they actually end up doing are almost never the same — and the difference drives how the economy adjusts.

The Precise Meaning in Macroeconomics

In your NCERT Class 12 Macroeconomics textbook (Chapter 4: Determination of Income and Employment), you'll encounter these terms when discussing Aggregate Demand (AD) and Aggregate Supply (AS).

Ex Ante Aggregate Demand is the total planned spending in the economy during a period — what households, firms, and the government intend to spend on consumption and investment.

Ex Ante Aggregate Supply is the total planned output that firms intend to produce and sell during that period.

Ex Post values are what actually happen — the realised consumption, realised investment, and realised output.

Important

The fundamental identity of national income accounting is that Ex Post Aggregate Demand always equals Ex Post Aggregate Supply. This is an accounting identity — what is actually spent must equal what is actually produced (after adjusting for inventory changes). But Ex Ante AD and Ex Ante AS need not be equal — and when they aren't, the economy adjusts.

The Key Identity (NCERT)

The NCERT textbook states the equilibrium condition for income determination as:

AD = AS

But here's the nuance: this equality holds Ex Post by definition. The interesting question is when it holds Ex Ante — that is, when planned spending equals planned output. That's the equilibrium of the economy.

C + I = C + S \quad \text{or} \quad I = S

When planned investment equals planned saving, the economy is in equilibrium — there is no tendency to change output.

Why the Distinction Matters

The gap between Ex Ante and Ex Post is what drives changes in output and employment.

Scenario 1: Ex Ante AD > Ex Ante AS

Planned spending exceeds planned output. Firms see their inventories falling below desired levels (Ex Post inventories < planned inventories). They respond by increasing production, which raises income and employment. The economy expands until planned spending and planned output match.

Scenario 2: Ex Ante AD < Ex Ante AS

Planned spending falls short of planned output. Inventories pile up (Ex Post inventories > planned inventories). Firms cut production, reducing income and employment. The economy contracts until balance is restored.

Watch out

A common mistake is to think Ex Ante and Ex Post are always equal. They are not — only Ex Post values are always equal by accounting definition. The whole process of income determination is about how the economy moves from a situation where Ex Ante values differ to one where they match.

A Concrete Numerical Example (No Invented Statistics)

Suppose in a simple two-sector economy:

Planned consumption: ₹400 crore
Planned investment: ₹100 crore
So Ex Ante AD = ₹500 crore …

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When planned spending exceeds planned output, inventories fall unexpectedly (unplanned disinvestment), which signals firms to raise production — so national income rises, not falls. Only (i) and (ii) are correct.

The key to this question lies in understanding inventory investment — the bridge between production and spending in the short run.

In any economy, firms produce a certain level of output (planned output). Households, firms, government, and foreigners together plan a certain level of spending (aggregate demand). These two rarely match exactly in the very short run. The difference is absorbed by inventories — stocks of unsold goods that firms hold.

When planned spending > planned output, people are buying more than what is currently being produced. Where do these extra goods come from? They come from the inventories that firms already have. So inventories fall — this is an unplanned decrease in inventories. That matches statement (i).

Now, what do firms do when they see their inventories shrinking unexpectedly? They realise demand is stronger than they thought. Their rational response is to increase production to rebuild inventories and meet the higher demand. More production means more income for workers and owners — so national income rises. That matches statement (ii). …

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Q.Suppose in an economy, planned spendings are greater than planned outputs. Identify the correct option with respect to effects on the economy :

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