Q.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).

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:

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."

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:

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

Which simplifies to:

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. …