Question

(I) Estimate the value of subsistence level of consumption expenditure from the following data, about an economy which is in equilibrium:

• [(i)] National Income (\(Y\)) = ₹ 1,500 crore
• [(ii)] Marginal Propensity to Consume (\(MPC\)) = 0.8
• [(iii)] Investment Expenditure (\(I\)) = ₹ 150 crore

(II) “An economy facing unplanned accumulation of inventories would try to increase its Aggregate Demand.”
Defend or refute the given statement with valid arguments.
(III) Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand:

• [(i)] Buying government securities (G-Sec) from public.
• [(ii)] Encouraging commercial banks to park their surplus funds with the Reserve Bank of India (RBI).

OR
(I) Complete the following table:

Hint:

OMO ↑ → liquidity ↑ (deficient demand)
Reverse repo ↑ → liquidity ↓ (excess demand)

Answer 1

(A)
(I) Subsistence Consumption
\[ Y = C + I \Rightarrow C = 1500 - 150 = 1350 \] \[ C = a + bY \Rightarrow 1350 = a + 0.8(1500) \] \[ 1350 = a + 1200 \Rightarrow a = 150 \] \[ \text{Subsistence consumption} = ₹150\ \text{crore} \] (II) Statement Analysis
Unplanned inventory accumulation means:

• Production>Demand
• Unsold stock increases

Firm’s reaction:

• Reduce production
• Reduce income and employment
• Aggregate demand falls further

\[ \text{Statement is false — firms reduce demand, not increase it} \] (III) Monetary Measures
(i) Buying government securities

• Tool: Open Market Operations (OMO)
• Effect: Increases money supply
• Used during: Deficient demand

(ii) Parking surplus funds with RBI

• Tool: Reverse Repo Rate
• Effect: Reduces money supply (liquidity absorbed)
• Used during: Excess demand

(B)
\[ K = \frac{1}{1 - MPC}, \quad \Delta Y = K \cdot \Delta I \] (a)
\[ K = \frac{1}{1 - 0.9} = 10,\quad \Delta Y = 10 \times 1000 = 10000 \] (i) = 10000,\quad (ii) = 10 (b)
\[ 4 = \frac{1}{1 - MPC} \Rightarrow MPC = 0.75 \] \[ \Delta I = \frac{4400}{4} = 1100 \] (iii) = 1100,\quad (iv) = 0.75 (c)
\[ K = \frac{1}{1 - 0.8} = 5,\quad \Delta Y = 5 \times 1200 = 6000 \] (v) = 6000,\quad (vi) = 5