Question

“If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an…

Accepted Answer

(a) Yes. If the actual demand for final goods falls short of the actual output corresponding to full employment level, it implies that demand by all the consumers and firms is less than the level of output produced at full employment level. Consequently, it may lead to an increase in the stock of unsold goods lying with the firms. Thereby, it may lead to an unintended accumulation of inventories. OR (b) Income (Y) (in ₹ Crore) Saving (in ₹ Crore) Average Propensity to Consume (APC) Marginal Propensity to Save (MPS) --- --- --- --- 0 (-) 50 - - 100 0 1 0.5 200 50 3/4 0.5 300 100 2/3 0.5 Consumption function, C = c + bY C = 50 + 0.5 Y Alternatively, consumption at ₹ 200 crore level of income = ₹ 150. Working Note: At an income level of ₹ 200 crore, Marginal Propensity to Save (MPS) = 0.5 and Marginal Propensity to Consume (MPC) = 1 - MPS ⇒ 1 - 0.5 = 0.5

Income (Y) (in ₹ crore)	Savings (S) (in ₹ crore)	Average Propensity to Consume (APC)	Marginal Propensity to Save (MPS)
$\displaystyle 0$	(–) $\displaystyle 50$	–	–
$\displaystyle 100$	……………	$\displaystyle 1$	……………
$\displaystyle 200$	……………	$\displaystyle 3$/$\displaystyle 4$	……………
$\displaystyle 300$	……………	$\displaystyle 2$/$\displaystyle 3$	……………

Income (Y) (in ₹ Crore)	Saving (in ₹ Crore)	Average Propensity to Consume (APC)	Marginal Propensity to Save (MPS)
$\displaystyle 0$	(-) $\displaystyle 50$	-	-
$\displaystyle 100$	$\displaystyle 0$	$\displaystyle 1$	$\displaystyle 0.5$
$\displaystyle 200$	$\displaystyle 50$	$\displaystyle 3$/$\displaystyle 4$	$\displaystyle 0.5$
$\displaystyle 300$	$\displaystyle 100$	$\displaystyle 2$/$\displaystyle 3$	$\displaystyle 0.5$

“If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an unintended accumulation of inventories.”
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