Question

10. Given (Numbers in Rs. Crores):
C = 50+ 0.8Yd
I=100
G= 200
X= 250
M = 20 +0.25 Y
T=0.3Y
Find Equilibrium Y.​

Answer 1

Explanation:

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPS = 1 - MPC = 1- 0.8 = 0.2

(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. So if income is zero, then

C = 200 + 0.8 * 0 = 200 crores

(iii) Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value.

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 200+0.8Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 200 + 0.8Y)

=> S = Y- 200 - 0.8Y

=> S = - 200 + Y ( 1 - 0.8)

=> S = -200 + 0.2Y

Therefore, the saving function is S= -200 + 0.2Y where autonomous savings= -200 crores, MPS= 0.2 and Y is income at all levels.

(iv) At income level 3,000 crores,

C= 200 + 0.8 (3000)

= 200+ 2400

= Rs. 2600 crores

At income level 5000 crores,

C= 200 + 0.8 (5000)

= 200+ 4000

= Rs. 4200 crores

(v) Break even point refers to the point where the income=consumption or savings= 0. Therefore,

Y=C

=> Y= 200 +0.8 Y

=> Y- 0.8 Y=200

=> 0.2 Y = 200

=> Y= 200/0.2 = 1000 crores.