Q18 of 25 Page 1

Explain how the level of effective demand is attained in an economy if, Aggregate Demand is more than the Aggregate Supply.

Effective demand is attained at the point where aggregate demand is equal to aggregate supply. Aggregate demand depends on the level of consumption and investment in the economy. Consumption always depends on the level of income in the short run. Aggregate demand curve will start from the y-axis because of the autonomous consumption. Therefore the aggregate demand curve depicts the nature of both investment and consumption.


Aggregate supply implies the total money supply in the economy which depicts income of the economy. It is the straight 45° line. The effective demand can also be the equilibrium level of income in the economy.


When the Aggregate demand is more than aggregate supply then equilibrium should be maintained by reducing the consumption expenditure.



The aggregate demand is greater than the aggregate supply is the condition at the point A. in that situation the economy will be facing inflationary gap. To overcome the problem of the inflationary gap the economy can promote savings, increase total output, increase tax rate etc.


This will increase the AS then the point shifts from the point A to Point E where the equilibrium is being obtained.


More from this chapter

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16

Identify which of the following statements is true?

a) The fiscal deficit is the difference between planned revenue expenditure and planned revenue receipts


b) Fiscal deficit is the difference between total planned expenditure and total planned receipts


c) Primary deficit is the difference between total planned receipt and interest payments.


d) The fiscal deficit is the sum of the primary deficit and interest payment.

 17

Estimate the value of Aggregate Demand in an economy if:

a) Autonomous Investment (I) = Rs. 100 Crore.


b) Marginal Propensity to Save (MPS) = 0.2


c) Level of Income (Y) = Rs. 4,000 crores.


d) Autonomous Consumption Expenditure (c) = Rs. 50 Crore


OR


In an economy, C= 200+ 0.5 Y is the consumption function where C is the consumption expenditure and Y is the national income. Investment expenditure is Rs. 400 crores. Is the economy in equilibrium at an income level Rs. 1500 crores? Justify your answer.

 19

What is meant by the problem of double counting? How this problem can be avoided?

OR


Discuss briefly, the circular flow of income in a two-sector economy with the help of a suitable diagram.

 20

Elaborate ‘economic growth' as the objective of the government budget.