Question

The value of marginal propensity to consume is 0.6 and initial income in the economy is 100 crore. Prepare a schedule showing income , consumption and saving.Also show the equilibrium level of income by assuming autonomous investment of 80 crore

Answer 1

Given :

MPC (Marginal propensity to consume = 0.6

Initial income = Rs 100

Autonomous investment = Rs 80

The consumption function is :

C = c₀ + cY

Where :

C = Total consumption

c₀ = Autonomous consumption = 0

c = MPC = 0.6

Y = Disposable income = 100

In our case the autonomous consumption is equal to 0 given that it is not mentioned. It takes an absolute value of 0.

Our equation now becomes :

C = 0 + 0.6Y

Savings = disposable income - consumption


THE SCHEDULE :

1.) When Y = 100

C = 60 savings = 40 Autonomous investment = 80

2.) When Y = 200

C = 120 Savings = 80 Autonomous investment = 80

3.) When Y = 300

C = 180 Savings = 120 Autonomous investment = 80

4.) When Y = 400

C = 240 Savings = 160 Autonomous investment = 80

5.) When Y = 500

C = 300 Savings = 200 Autonomous investment = 80

At equilibrium income :

Aggregate demand = Aggregate supply

Aggregate demand = Consumption + Investment

Aggregate supply = Consumption + Savings

At Y = 200 :

Aggregate demand = 120 + 80 = 200

Aggregate supply = 120 + 80 = 200

We see that Aggregate demand = Aggregate supply

And thus the equilibrium income is Rs 200.