Question

An economy is in equilibrium. From the following data about an economy, calculate autonomous consumption.
Income = 5,000
Marginal Propensity to Save = 0.2
Investment Expenditure = 800
(Autonomous Consumption = 200)

Answer 1

If MPS=0.2, then

MPC= 1-MPS= 1-0.2= 0.8

Consumption Function is C = c + 0.8 Y where Y in the income in the economy and c= Autonomous consumption.

At equilibrium level of output,

AS=AD

Y= C+I

=> 5,000 = c + 0.8 (5,000) + 800

=> 5,000 = c+ 4,000 + 800

=> 5,000 = c+ 4,800

=> c = 5,000- 4,800 = 200.