Q.Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative from those given below. Assertion (A) : Ex-ante savings and Ex-ante investments are never equal to each other. Reason (R) : At equilibrium level of income, aggregate demand may not be equal to the aggregate supply. Alternatives : (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of the Assertion (A). (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A). (C) Assertion (A) is true, but Reason (R) is false. (D) Assertion (A) is false, but Reason (R) is true.

The assertion claims ex-ante (planned) savings and ex-ante investments are never equal. This is false. In the two-sector model, equilibrium income is precisely the level where planned aggregate demand equals aggregate supply, which translates to the condition that ex-ante savings equal ex-ante investment ($S = I$). Away from equilibrium they differ, but at equilibrium they must match — that is the defining characteristic of equilibrium in the Keynesian framework.

The reason states that at equilibrium income, aggregate demand may not equal aggregate supply. This contradicts the definition of equilibrium itself. Equilibrium income is determined by the condition $AD = AS$ (or equivalently $C + I = C + S$, giving $S = I$). If aggregate demand did not equal aggregate supply, the economy would not be in equilibrium; unintended inventory changes would push income toward the equilibrium level. …

The question tests your understanding of the equilibrium condition in the simple Keynesian model of income determination. Let's unpack what ex-ante means and why equilibrium forces these magnitudes to align.

Ex-ante vs Ex-post: The Planning Distinction

Ex-ante refers to planned or intended magnitudes—what households plan to save and what firms plan to invest before production decisions are made. Ex-post refers to realized or actual values after all transactions have occurred. In any accounting period, ex-post savings must equal ex-post investment (because unsold inventory counts as unintended investment), but ex-ante magnitudes need not match unless the economy is in equilibrium.

The Equilibrium Condition

Equilibrium income is defined as the level of national income at which aggregate demand (AD) equals aggregate supply (AS), or equivalently, where planned spending equals planned output. In the two-sector model (households and firms), this translates to:

where $Y$ is income/output, $C$ is planned consumption, and $I$ is planned (ex-ante) investment.

Since income is either consumed or saved ($Y = C + S$), we can substitute:

Canceling consumption from both sides gives the equilibrium condition in its savings-investment form:

This equality holds only at equilibrium. When the economy is out of equilibrium—say, planned investment exceeds planned savings—aggregate demand exceeds aggregate supply, inventories fall below desired levels, and firms expand output until income rises enough that savings catch up to investment.

Evaluating the Statements

Assertion (A): "Ex-ante savings and ex-ante investments are never equal to each other."

This is false. They are equal at the equilibrium level of income. Away from equilibrium they differ, but the economy adjusts toward equilibrium where they match.

Reason (R): "At equilibrium level of income, aggregate demand may not be equal to the aggregate supply."

This is also false. Equilibrium is defined as the state where $AD = AS$. If aggregate demand did not equal aggregate supply, by definition the economy would not be in equilibrium—there would be unintended inventory changes prompting output adjustments.