Question

12.The saving function of an economy is given as

S= (-) 10+0.20Y

If the ex-ante investments are Rs240 crore, calculate the following :

i) Equilibrium level of income in the economy.

ii) Additional investments which will be needed to double the present level

of equilibrium income​

Answer 1

Explanation:

S=I

-10+.20 Y=240

Y=1250

K=1/MPS=1/.20=5

K=Change in income/Change in investment

5=1250/Change in investment

Change in investment =250

Ans. Equilibrium level of income =Rs 1250

Additional investment which-250( -10+.2Y=240+250=2500)

Answer 2

Given,

1. The saving function, S = (-10) + 0.20Y
2. Ex-ante investments = ₹ 240 crores

To find,

a) The equilibrium level of income

b) The additional amount of requirement to double the present equilibrium level of income

Solution,

a) The condition required for equilibrium,

Savings(S) = Investment(I)

⇒ (-10) + 0.20Y = 240

⇒0.20Y = 250

⇒ Y = $\frac{250}{0.20}$

⇒ Y= ₹ 1250 crores

b) We know that, Income Multiplier(K) = $\frac{1}{MPS}$ , and from the given saving function MPS = 0.2

⇒ K = $\frac{1}{0.2}$ = 0.5

Another formula for income multiplier, K = $\frac{ChangeInIncome}{ChangeInInvestment}$

Now, we have to double the present income

so, change in income = 1250

⇒ 0.2 = $\frac{1250}{ChangeInInvestment}$

⇒ Change in investment = $\frac{1250}{0.2}$ = ₹ 250 crores

Hence, the equilibrium level of income is ₹1250 crores and the additional amount of investment required to double the income is ₹ 250 crores.