Question

The saving function in an economy is given as: -
S= (-) 50+ 0.10Y
If ex-ante investments are Rs 450 crore, calculate the following
(A) Equilibrium level of income in the economy
(B) Additional investments which will be needed to gain an additional income of Rs 3000 crore​

Answer 1

Answer:

S= -50+0.4 Y

C+S=Y

=> C = Y-S

= Y - (-50+0.4 Y)

= Y + 50 - 0.4 Y

= 50 + 0.6 Y

Hence, C = 50 + 0.6 Y

Consumption at equilibrium level of income,

C = 50 + 0.6 ( 21,500)

= 50 + 12,900

= 12,950 crores

(i) At equilibrium level of output,

AS=AD

Y= C+I

=> 21,500= 12,950 + I

=> 21,500 – 12,950 = I

=> I = 8,550 crores

(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.

c= 50 crores

(iii) Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

K= 1/ MPS

K= 1/ 0.4 = 2.5 times

Answer 2

Answer: (A) Equilibrium level of National Income = Rs. 5000 crore

(B) Additional investments = Rs. 500 crore

Explanation:

(A) We know that the equilibrium level of income in an economy is determined when: S = I

Substituting S = (–) 50 + 0.10Y and I = 450, we have

–50 + 0.10Y = 450

0.10Y = 450+50

0.10 Y = 500

Y = 500 / 0.10

Y = 5000

Equilibrium level of income in the economy = Rs. 5000 crore

(B) From the savings function S = (–) 50 + 0.10Y, MPS = 0.10

Value of investment multiplier, k = 1/MPS = 1/0.10 = 10

To gain an additional income of Rs. 3000 crore (ΔY = 5000 crore), suppose additional investments needed = ΔI

k = ΔY/ΔI

10 = 5000/ΔI

ΔI =  5000/10 = 500

Additional investments needed = Rs. 500 crore