Question

The function of saving (S) is given to be: S = - 40 + 0.25 Y. If planned investments are Rs.100 crores, determine: (a) Equilibrium level of income; (b) Level of consumption at equilibrium; (c) Saving at equilibrium.
((a) Rs. 560 crores; (b) Rs. 460 crores; (c) Rs. 100 crores)

Answer 1

S= -40+0.25 Y

C+S=Y

=> C = Y-S

= Y - (-40+0.25 Y)

= Y + 40 - 0.25 Y

= 40 + 0.75 Y

Hence, C = 40 + 0.75 Y.

(a) At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 40 + 0.75 Y + I

=> Y - 0.75 Y = 40 + 100

=> 0.25 Y = 140

=> Y = 140/ 0.25 = 560 crores

(b) Level of consumption at equilibrium income of 500 crores

C=40 + 0.75 ( 560)

= 40 + 420

= 470 crores

(c) Saving at equilibrium level of income,

Savings= Investment

= 100 crores