"In an economy, ex-ante Aggregate Supply is more than ex-ante Aggregate Demand." Explain its impact on the level of output, income and employment. Complete the following table. Construct/Express the Consumption function at Rs. 200 crore level of income.

Question

Accepted Answer

When ex-ante Aggregate Supply is more than ex-ante Aggregate Demand, there is excess supply in the economy. This leads to:

**Impact on Output, Income and Employment:**

1. **Inventory Accumulation:** Firms produce more than what is demanded.
2. **Production Cut:** Firms reduce production to match lower demand.
3. **Income Fall:** Lower production leads to lower factor payments, decreasing national income.
4. **Employment Decrease:** Less production requires less labor.

**Consumption and Saving Functions:**
- Consumption Function: C = C̄ + bY (where C̄ is autonomous consumption, b is MPC)
- Saving Function: S = -C̄ + (1-b)Y (where -C̄ is dissaving at zero income, 1-b is MPS)

The economy adjusts until AD = AS, i.e., until the planned expenditure equals planned output.