Question

Estimate the value of Aggregate Demand (AD) in an imaginary economy:

Hint:

To calculate Aggregate Demand, we add the consumption value (which depends on income and the Marginal Propensity to Consume) and autonomous investment.

Answer 1

We are given the following data:
- Autonomous Investment \( I_0 = ₹ 100 \) crore
- Marginal Propensity to Save (MPS) = 0.2
- Level of Income (Y) = ₹ 4000 crore
- Autonomous Consumption Expenditure \( \overline{C} = ₹ 50 \) crore
To calculate Aggregate Demand (AD), we need to determine the Consumption (C) and Investment (I).
1. The Marginal Propensity to Consume (MPC) is the complement of MPS: \[ MPC = 1 - MPS = 1 - 0.2 = 0.8 \] 2. The consumption function is given by: \[ C = \overline{C} + (MPC \times Y) \] Substituting the given values: \[ C = 50 + (0.8 \times 4000) = 50 + 3200 = 3250 \text{ crore} \] 3. The Aggregate Demand (AD) is the sum of Consumption (C) and Investment (I): \[ AD = C + I_0 = 3250 + 100 = 3350 \text{ crore} \] Thus, the Aggregate Demand (AD) is ₹ 3350 crore.