Answer the following questions based on the data given below : (i) Planned investment = ₹ 100 crore (ii) C = 5

Question 30 of 104

Q. Answer the following questions based on the data given below :

(i) Planned investment = ₹ 100 crore

(ii) C = 50 + 0·5 Y.

(a) Determine the equilibrium level of income.

(b) Calculate the saving and consumption expenditure at equilibrium level of National Income.

Puducherry CbseCBSE Class XII Board 2020Subjective· 6mImportance★★★★★

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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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The equilibrium level of income is found where Aggregate Demand equals Aggregate Output. Using the given consumption function and planned investment, equilibrium income is ₹300 crore, with consumption of ₹200 crore and saving of ₹100 crore.

Let’s begin with the core idea. In the Keynesian framework, the equilibrium level of national income is determined where Aggregate Demand (AD) equals Aggregate Supply (AS) — that is, where total planned spending in the economy exactly matches the total output produced. For a two-sector economy (households and firms), AD is the sum of consumption expenditure (C) and planned investment (I). AS is simply the national income (Y) itself.

The given consumption function is:

C = 50 + 0.5Y

This tells us that even when income is zero, households still spend ₹50 crore (autonomous consumption). The marginal propensity to consume (MPC) is 0.5 — meaning half of any additional income is spent on consumption, and the other half is saved.

Planned investment is given as ₹100 crore, and it is assumed to be autonomous (independent of income).

(a) Determine the equilibrium level of income

The equilibrium condition is:

AD = AS

Where:

AD = C + I

And:

AS = Y

So:

Y = C + I

Substitute the given values:

Y = (50 + 0.5Y) + 100

Simplify:

Y = 150 + 0.5Y

Bring the term involving Y to the left:

Y - 0.5Y = 150

0.5Y = 150

Y = \frac{150}{0.5} = 300

Y = \frac{\text{Autonomous expenditure}}{1 - \text{MPC}} = \frac{50 + 100}{1 - 0.5} = \frac{150}{0.5} = 300

Thus, the equilibrium level of national income is ₹300 crore.

Watch out

A common mistake is to forget that the consumption function already includes autonomous consumption. Do not add the ₹50 crore again separately — it is already part of C. Also, ensure you use the correct MPC (0.5) in the multiplier formula.

(b) Calculate saving and consumption expenditure at equilibrium

At equilibrium income of ₹300 crore, we first find consumption: …

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Q.Answer the following questions based on the data given below :

(a) Determine the equilibrium level of income

(b) Calculate saving and consumption expenditure at equilibrium

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