The value of mpc is 0.6 and initial income in the economy is ₹100 crores. prepare a schedule showing income, consumption and saving. also show the equilibrium level of income by assuming autonomous investment of ₹ 80 crores.
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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
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
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