Estimate the value of Aggregate Demand (AD) in an imaginary economy : (i) Autonomous Investment (I_0) = Rs. 200 crore (ii) Investment Multiplier (K) = 5 (iii) Level of Income (Y) = Rs. 4,000 crore (iv) Autonomous consumption expenditure (c̄) = Rs. 50 crore

Question

Accepted Answer

**Given:**
- Autonomous Investment (I₀) = ₹200 crore
- Investment Multiplier (K) = 5
- Level of Income (Y) = ₹4,000 crore

**Step 1: Calculate MPS**
K = 1/MPS
5 = 1/MPS
MPS = 1/5 = 0.2

**Step 2: Calculate MPC**
MPC = 1 - MPS = 1 - 0.2 = 0.8

**Step 3: Calculate Consumption Function**
We need autonomous consumption (C̄). From the chapter, at Y = 0, C = 40 (autonomous consumption).
C = C̄ + bY = 40 + 0.8Y

**Step 4: Calculate AD**
AD = C + I
AD = (40 + 0.8 × 4000) + 200
AD = (40 + 3200) + 200
AD = 3240 + 200
AD = ₹3,440 crore

**Answer: Aggregate Demand (AD) = ₹3,440 crore**