The graph shows the AD line and the 45° line. At an income of ₹480 crore (point B), what happens? An AD line starting at ₹100 crore and a dashed 45° line meeting at E (₹400 crore). At an income of ₹240 crore, AD is ₹280 crore (point A, above the 45° line). At an income of ₹480 crore, AD is ₹460 crore (point B, below the 45° line).

The graph shows the AD line and the 45°…

The graph shows the AD line and the 45° line.

Question 5

MediumOriginal question

The graph shows the AD line and the 45° line. At an income of ₹480 crore (point B), what happens?

An AD line starting at ₹100 crore and a dashed 45° line meeting at E (₹400 crore). At an income of ₹240 crore, AD is ₹280 crore (point A, above the 45° line). At an income of ₹480 crore, AD is ₹460 crore (point B, below the 45° line).

Output exceeds AD by ₹20 crore, unsold stock piles up and output fallsCorrect answerYour answerAD exceeds output by ₹20 crore and output risesCorrect answerYour answerThe economy is in equilibriumCorrect answerYour answerOutput exceeds AD by ₹80 croreCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer A

Correct answer: A

At Y = 480, AD = 460 (point B lies below the 45° line).
Output is 20 more than planned spending, so unplanned stock builds up and firms cut output towards E.

Worth noting

₹80 crore is the gap between 480 and equilibrium 400, not the gap between output and AD at 480.

Concept: Above equilibrium
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsEquilibrium: AD equals output

Practise this chapter →

Ten questions from Income Determination & the Multiplier, at your own pace.

Practise this chapter →

Ten questions from Income Determination & the Multiplier, at your own pace.

The graph shows the AD line and the 45° line.

Question 5

Explanation