Estimating the value of ex-ante AD

To estimate the value of ex-ante aggregate demand (AD), we need to consider the components of AD, which are consumption expenditure (C) and investment expenditure (I). Given that autonomous investment and consumption expenditure are Rs. 50 crores, and the marginal propensity to save (MPS) is 0.2, we can calculate the value of ex-ante AD.

Components of ex-ante AD

Ex-ante AD is the total spending in an economy before any adjustments are made for changes in income. It is influenced by autonomous components such as investment and consumption expenditure. The formula for estimating ex-ante AD is as follows:

Ex-ante AD = C + I

Where:
C = Consumption expenditure
I = Investment expenditure

Calculating consumption expenditure

Given that autonomous consumption expenditure is Rs. 50 crores and MPS is 0.2, we can calculate the consumption expenditure using the formula:

C = Autonomous consumption expenditure / (1 - MPS)

C = 50 crores / (1 - 0.2)
C = 50 crores / 0.8
C = 62.5 crores

Calculating ex-ante AD

Now that we have the value of consumption expenditure (C) and investment expenditure (I), we can calculate the ex-ante AD using the formula:

Ex-ante AD = C + I

Ex-ante AD = 62.5 crores + 50 crores
Ex-ante AD = 112.5 crores

Therefore, the estimated value of ex-ante AD is Rs. 112.5 crores.

Explanation:

The calculation involves considering the components of aggregate demand, which are consumption expenditure and investment expenditure. Consumption expenditure is determined by autonomous consumption (Rs. 50 crores) and the marginal propensity to save (MPS = 0.2). By using the formula for consumption expenditure, we find that it is Rs. 62.5 crores.

To calculate the ex-ante AD, we add the consumption expenditure and investment expenditure. In this case, the investment expenditure is given as Rs. 50 crores. By adding the consumption and investment expenditures, we find that the ex-ante AD is estimated to be Rs. 112.5 crores.

The estimation of ex-ante AD is important as it helps in understanding the total spending in an economy before considering any adjustments for changes in income. It provides an initial assessment of the level of demand in the economy and can be used to analyze the potential impact of policy changes or shifts in autonomous components on aggregate demand.