Question

Estimate the value of Aggregate Demand in an economy if: 

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

(b) Marginal Propensity to Save = 0.2 

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

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

Answer 1

The Aggregate Demand (AD) function is given as : 

 AD = C + I 

 AD = {C' +b(Y)} + I 

C' = 50 

(Given) 

 b or MPC = 1 – MPS = 1 – 0.2 = 0.8 

Substituting the values of c and b in AD function, we get : 

 AD = {50 + 0.8 (4000)} + 100 = Rs. 3,350 crores 

Aggregate Demand is Rs. 3,350 crores