Income And Output Determination

The sharp decline in overall demand, particularly in the private consumption segment, signals a slowdown in economic activity. In such a situation, the government can implement the following measures to stimulate demand and revitalize the economy:
1. Increase in Government Spending (Fiscal Stimulus): The government can increase its spending on infrastructure, public services, and welfare programs to directly stimulate demand in the economy. This will increase the income of individuals and businesses, which will then lead to an increase in consumption and investment.
2. Tax Reductions (Fiscal Policy): Reducing taxes, especially income taxes and indirect taxes, can increase the disposable income of individuals and firms. This will encourage increased consumption and investment. Lower taxes lead to more money in the hands of consumers, which can boost demand in the economy.
3. Monetary Policy (Lower Interest Rates): The central bank can reduce interest rates to make borrowing cheaper for businesses and consumers. This would stimulate investments by firms and increase consumption by individuals, helping boost demand. A reduction in interest rates also reduces the cost of capital for businesses, making it easier for them to invest in growth.
4. Subsidies for Key Sectors: Targeted subsidies in sectors that are highly sensitive to demand fluctuations (such as housing, automobiles, and consumer goods) can encourage consumption in those sectors.
In summary, the government can use a combination of fiscal and monetary policies to stimulate economic demand and address the decline in consumption.

1. Break-even Level of Income:
At the break-even point, Income (Y) = Consumption (C)
Given: Autonomous Consumption Expenditure ( ) = ₹ 250 crore
At break-even point, no savings means: 2. Equilibrium Level of Income:
We know that: Substituting the given values: Therefore, the Equilibrium Level of Income is ₹ 2250 crore.

In a two-sector economy (consisting of households and firms), Aggregate Demand (AD) is the total demand for goods and services. It is determined by adding consumption expenditure (C) and investment expenditure (I). Thus, the correct relationship is: Therefore, the correct option is (A).

Statement 1 is true because Marginal Propensity to Consume (MPC) is defined as the additional consumption out of an additional unit of income.
Statement 2 is false because according to Keynesian consumption theory, as income rises, the proportionate increase in consumption is typically less than the increase in income, due to the tendency of individuals to save a part of their additional income.

In Keynesian economics, the 'Reference Line' or the 45-degree line represents situations where aggregate expenditure is equal to aggregate output or income. This line is drawn at a 45° angle from the origin on the income-expenditure diagram, indicating points where planned spending equals actual output.