Question

The consumption function is given as C = 75 + 0.75 Y and autonomous investment is Rs. 100 crore. Derive the saving function and calculate the level of income at which saving is equal to investment.
(Saving Function: S = -75 + 0.25 Y; Level of income = Rs. 700 crore)

Answer 1

The consumption function is C= 75+0.75 Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 75 + 0.75 Y)

=> S = Y- 75 - 0.75 Y

=> S = - 75 + Y ( 1 - 0.75)

=> S = -75 + 0.25 Y

Therefore, the saving function is S= -75 + 0.25 Y where autonomous savings= -75 crores, MPS= 0.25 and Y is income at all levels.

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 75+ 0.75 Y + 100

=> Y - 0.75 Y = 75+ 100

=> 0.25 Y = 175

=> Y = 175/ 0.25 = 700 crores

At equilibrium level of Income, consumption expenditure is

Savings = Investment

= 100 crores