Suppose in a hypothetical economy, Y = 50 + 0·8Y + 100, where Y = National Income. The value of Investment Mul

Question 102 of 104

Q. Suppose in a hypothetical economy, Y = 50 + 0\cdot8Y + 100, where Y = National Income. The value of Investment Multiplier (K) would be __________. (Choose the correct option to fill in the blank) Options : (A) 5 (B) 0\cdot2 (C) 50 (D) 0\cdot8

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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 given equation represents the equilibrium condition for national income. By identifying the Marginal Propensity to Consume (MPC) from this equation, we can calculate the Investment Multiplier using its standard formula. The value of the Investment Multiplier is $\boxed{5}$ .

In macroeconomics, the equilibrium level of national income ( $Y$ ) is achieved when the aggregate demand (AD) in the economy equals the aggregate supply (AS), which is equivalent to the total output or national income. In a simple two-sector economy (households and firms), aggregate demand consists of consumption (C) and investment (I). Thus, the equilibrium condition is $Y = C + I$ .

The given equation, $Y = 50 + 0.8Y + 100$ , directly represents this equilibrium. Here, the term $50 + 0.8Y$ corresponds to the consumption function ( $C$ ), and $100$ represents autonomous investment ( $I$ ).

The consumption function, $C = a + bY$ , shows how consumption expenditure relates to national income. In this function:

$a$ is autonomous consumption (consumption that occurs even at zero income). Here, $a = 50$ .
$b$ is the Marginal Propensity to Consume (MPC), which indicates the proportion of an additional unit of income that is spent on consumption. Here, $b = 0.8$ .

The Investment Multiplier (K) is a crucial concept that explains how an initial change in autonomous investment leads to a much larger change in the equilibrium level of national income. It arises because an initial investment creates income, which is then partly consumed, leading to further income generation, and so on, in a continuous cycle. The size of this multiplier effect depends directly on the Marginal Propensity to Consume (MPC). A higher MPC means a larger portion of additional income is consumed, leading to a stronger multiplier effect. …

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Q.Suppose in a hypothetical economy, Y = 50 + 0·8Y + 100, where Y = National Income. The value of Investment Multiplier (K) would be __________. (Choose the correct option to fill in the blank) Options : (A) 5 (B) 0·2 (C) 50 (D) 0·8

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