Question

The saving function of an economy is given as: S = - 50 + 0.4 Y. The economy is in equilibrium at the Income level of Rs. 21,500 crores. Calculate: (a) Investment at equilibrium income level; (b) Autonomous consumption; (c) Multiplier. ((a) Rs. 550 crores; (b) Rs. 550 crores; (c) 2.5)

Answer 1

S= -50+0.4 Y

C+S=Y

=> C = Y-S

= Y - (-50+0.4 Y)

= Y + 50 - 0.4 Y

= 50 + 0.6 Y

Hence, C = 50 + 0.6 Y

Consumption at equilibrium level of income,

C = 50 + 0.6 ( 21,500)

= 50 + 12,900

= 12,950 crores

(i) At equilibrium level of output,

AS=AD

Y= C+I

=> 21,500= 12,950 + I

=> 21,500 – 12,950 = I

=> I = 8,550 crores

(ii)Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy.

c= 50 crores

(iii) Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ MPS

K= 1/ 0.4 = 2.5 times