If in an economy, Saving Function is given by S = (-) 50 + 0.2 Y and Y = Rs. 2,000 crores; consumption expenditure for the economy would be Rs. -1,650 crores and the autonomous investment is Rs. 50 crores and the marginal propensity to consume is 0.8. True or False? Justify your answer with proper calculations.

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Solution

If S = - 50 + 0.2 Y , then at income of Rs. 2,000 crores savings will be
S = -50 + 0.2 (2,000)
= -50 + 400
= Rs. 350 crores
At equilibrium level of income:
Y =C+S
=> 2,000 = C + 350
=> C = 2,000 - 350 = Rs. 1650 crores)
Since. MPC + MPS = 1
MPC + 0.2 =1
MPC = 1- 0.2 = 0.8
Therefore, all the value are absolutely correct in the given equilibrium level of income.

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