"In an economy Planned spending is more than planned output". Explain its impact on the level of output, income and employment. For a hypothetical economy, assuming there is an increase in the Marginal Propensity to Consume from 80% to 90% and change in investment to be Rs. 2,000 crore. Using the concept of investment multiplier, calculate the increase in income due to change in Marginal Propensity to Consume.

Question

Accepted Answer

**Impact when Planned Spending > Planned Output:**

When aggregate demand exceeds aggregate supply, there is excess demand in the economy. The impact is:
- **On Output:** Firms experience unplanned decline in inventories as demand exceeds production. To meet the excess demand, firms increase production, leading to rise in output
- **On Income:** As output increases, factor incomes (wages, rent, interest, profit) rise, increasing national income
- **On Employment:** To produce more output, firms hire more workers, increasing employment

**Numerical Example:**
If MPC = 0.8 and autonomous investment increases by ₹100 crore:
Multiplier (K) = 1/(1-MPC) = 1/(1-0.8) = 5
Change in Income = K × Change in Investment = 5 × 100 = ₹500 crore