(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:

Question

Refer the given text carefully: According to the Economic Survey 2024-25, the government budget’s projections for the fiscal year 2025-26 indicate that gross direct tax revenue will rise by 12.7%, while gross indirect tax collections are expected to grow by 8.3% relative to FY 2024-25. Direct taxes include income tax and corporate tax, reflecting earnings and profits of households and firms. It plays a key role in revenue growth of the government. Indirect taxes encompass Goods and Services Tax (GST), custom duties and other transaction-based levies. Higher growth rate projected for direct taxes suggests a push to enhance tax buoyancy through improved compliance and reforms. On the other hand, indirect taxes are expected to benefit from consumption trends and Goods and Services Tax (GST) administration improvements. The balance tax strategy aims to mobilize resources while supporting fiscal consolidation and sustainable economic growth. On the basis of the above passage and common understanding, answer the following questions: (i) Differentiate between the two types of taxes indicated in the above text, with suitable examples. (ii) Elaborate the likely consequences of the tax projections made by the government.

Answer 1

Step 1: Understanding the Concept:
Subsistence consumption refers to autonomous consumption ($\bar{C}$), which is the level of consumption when income is zero. At equilibrium, Aggregate Demand ($AD$) equals National Income ($Y$).
Step 2: Key Formula or Approach:
1. $AD = C + I$
2. $C = \bar{C} + bY$ (where $b = MPC$)
3. At Equilibrium: $Y = \bar{C} + bY + I$
Step 3: Detailed Explanation:
Given: $Y = 1500$, $b = 0.8$, $I = 150$.
Substitute in the equilibrium equation:
\[ 1500 = \bar{C} + (0.8 \times 1500) + 150 \]
\[ 1500 = \bar{C} + 1200 + 150 \]
\[ 1500 = \bar{C} + 1350 \]
\[ \bar{C} = 1500 - 1350 = 150 \text{ crore} \]
Step 4: Final Answer:
The subsistence level of consumption expenditure is ₹ 150 crore.
II
Step 1: Understanding the Concept:
Unplanned accumulation of inventories occurs when Aggregate Supply ($AS$) is greater than Aggregate Demand ($AD$).
Step 2: Detailed Explanation:
1. The Situation: If $AS>AD$, goods remain unsold, leading to an unplanned increase in stocks (inventories).
2. Producer Reaction: To clear the excess stock, producers will reduce production in the next period.
3. Impact on Economy: Reduced production leads to lower employment and lower income generation.
4. Logical Flaw in Statement: The economy doesn't "try to increase AD" to solve this; rather, producers adjust supply downward until $AS$ once again equals $AD$. Market forces naturally move toward equilibrium by cutting output.
Step 3: Final Answer:
Refuted. Producers will reduce production and output to align supply with demand, rather than the economy directly increasing demand.
III
Step 1: Understanding the Concept:
Monetary policy tools regulate the money supply to control inflation (Excess Demand) or deflation (Deficient Demand).
Step 2: Detailed Explanation:
(i) Buying G-Sec (Open Market Purchase):
- Measure: Open Market Operations (OMO).
- Usage: Used during Deficient Demand.
- Reason: When RBI buys securities, it pays cash to the public/banks. This increases the liquidity and money supply, leading to higher credit availability and higher Aggregate Demand.

(ii) Parking funds with RBI (Reverse Repo Rate):
- Measure: Reverse Repo Rate.
- Usage: Used during Excess Demand.
- Reason: By offering higher interest (Reverse Repo Rate), RBI encourages banks to park money with it instead of lending to the public. This reduces the lending capacity of banks and helps curb Excess Demand.
Step 3: Final Answer:
(i) OMO for deficient demand. (ii) Reverse Repo for excess demand.
IV
Step 1: Understanding the Concept:
The Investment Multiplier ($k$) is the ratio of change in income to change in investment.
Step 2: Key Formula or Approach:
1. $k = \frac{1}{1 - MPC}$
2. $k = \frac{\Delta Y}{\Delta I}$
Step 3: Detailed Explanation:
For Situation (a):
$MPC = 0.9$. So, $k = \frac{1}{1 - 0.9} = \frac{1}{0.1} = 10$ (ii).
$\Delta Y = k \times \Delta I = 10 \times 1000 = 10000$ (i).

For Situation (b):
$k = 4$. So, $4 = \frac{1}{1 - MPC} \Rightarrow 1 - MPC = 0.25 \Rightarrow MPC = 0.75$ (iv).
$\Delta I = \frac{\Delta Y}{k} = \frac{4400}{4} = 1100$ (iii).

For Situation (c):
$MPC = 0.8$. So, $k = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5$ (vi).
$\Delta Y = k \times \Delta I = 5 \times 1200 = 6000$ (v).
Step 4: Final Answer:
The missing values are: (i) 10000, (ii) 10, (iii) 1100, (iv) 0.75, (v) 6000, (vi) 5.

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