Question

(a) Given the following information, state whether the economy is in
equilibrium or not:
Sr.
Particulars
Amount
No
Autonomous Consumption &
Investment Expenditure (A)
700 crores
(m) Marginal Propensity to Consume (MPC) 0.8
fim National Income
24.000 crores
(b) Answer the following questions based on the figure given below:
S = 30 +0.2 Y
Savings
B
→x-axis
Income
At which level of income Average Propensity to Save (APS) will
be equal to zero & why?
(a) What does OA signify with respect to consumption function.​

Answer 1

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.

Answer 2

Answer :

(A) Insufficient information to determine equilibrium. (b) APS is zero where savings curve intersects x-axis. (c) Point OA signifies autonomous consumption expenditure.

Explanation :

(a) The given information is not sufficient to determine whether the economy is in equilibrium or not. We need to compare the total autonomous expenditure (A) with the total induced expenditure, which depends on the level of national income. The induced expenditure is calculated by multiplying the marginal propensity to consume (MPC) with the level of national income. If the total autonomous expenditure is equal to the total induced expenditure, the economy is in equilibrium.

(b) At the point where the savings curve intersects the x-axis (Y-axis), the average propensity to save (APS) will be equal to zero. This is because the savings are zero at this point and the average propensity to save is calculated as savings divided by income. Therefore, when savings are zero, the APS will also be zero.

(c) The point OA signifies the level of autonomous consumption expenditure. It is the point where the consumption function intersects the vertical axis (Y-axis), and there is no income. Therefore, the consumption at this point is equal to autonomous consumption expenditure.

In conclusion, the given information is not sufficient to determine whether the economy is in equilibrium or not. The intersection of the savings curve with the x-axis represents the point where the average propensity to save (APS) is equal to zero. Finally, the point OA on the consumption function represents the level of autonomous consumption expenditure at zero income.

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