Question

The ratio of MPC and MPS is 4:1. The consumption at zero level of income is Rs. 40 crores.

(a) Frame a consumption equation

(b) Value of multiplier

(c) Break-even level of income

OR

The consumption equation is C = 125 + 0.5Y.
(a) Calculate break-even level of income.
(b) Calculate investment if the equilibrium level of income is Rs. 400 crores.

Answer 1

MPC : MPS = 4 : 1
MPC = $\frac{4}{5}=0.8$
MPS = $\frac{1}{5}=0.2$

(a) C = C' + bY = 40 + 0.8Y

(b) Value of multiplier= $\frac{1}{MPS}$ = $\frac{1}{0.2}=5$

(c) Break-even level of income is a level of income at which Y = C
Y = 40+ 0.8Y
0.2Y = 40
Y = Rs. 200 crores

OR

The consumption equation is C = 125 + 0.5Y.

(a) Break-even level of income is a level of income at which Y = C
Y = 125 + 0.5Y
0.5Y = 125
Y = Rs.250 crores

(b) At equilibrium,
Y = C+I
Y = 125 + 0.5Y + I
400 = 125 + 0.5(400) + I
Investment = Rs. 75 crores