Question

The value of MPC of an economy is 0.4. What amount of new investment is required to generate new income of Rs. 500 crore in the economy

Answer 1

As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption (\bar { A\quad } ) = Rs 50 crore MPS = 0.2

So, MPC(b) = 1 – 0.2 = 0.8

(MPC = 1 – MPS)

AD = C + I

AD = \bar { C } + bY + I = \bar { A\quad } + bY

= 50 + 0.8Y (\bar { A\quad } =\bar { C } +\bar { 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