Question

8. Given that MPC=0.8 and Investment =40, Complete the table: 6
Income Consumptio Savings AD
AS
n
0
60
100
200
300
400
500
600​

Answer 1

ure (A) is Rs 50 crores, and MPS is 0.2 and level of income (Y) is Rs 4000 crores. State whether the economy is in equilibrium or not (cite reasons).[3-4 Marks]

Answer: As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption (A¯) = Rs 50 crore MPS = 0.2

So, MPC(b) = 1 – 0.2 = 0.8

(MPC = 1 – MPS)

AD = C + I

AD = C¯ + bY + I = A¯ + bY

= 50 + 0.8Y (A¯=C¯+I¯)

As we know, the equilibrium level of national income in two-sector model is determined where,

AS = AD

Y = 50 + 0.8Y

4000 = 50 + 0.8(4000)

4000 = 50 + 3200

4000 =3250

Hence, the economy is not in equilibrium.