Question

16. (a) Distinguish between autonomous investment and induced investment.
14)
(61
(b) on the basis of the following information about an economy calculate its equilibrium level of income
( autonomous consumption = 100 (1) MPC = 0.75(il) investment = 5000
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Answer 1

Answer:

if MPS=0.2, then  

MPC= 1-MPS= 1-0.2= 0.8  

 

Consumption Function is C = c + 0.8 Y where Y in the income in the economy and c= Autonomous consumption.  

At equilibrium level of output,

AS=AD

Y= C+I  

=> 5,000 = c + 0.8 (5,000)  + 800

=> 5,000 = c+ 4,000 + 800  

=> 5,000 = c+ 4,800

=> c = 5,000- 4,800 = 200.