(a) Estimate the value of Aggregate Demand (AD) in an imaginary economy : (i) Autonomous Investment (I_0) = Rs. 100 crore (ii) Marginal Propensity to Save (MPS) = 0.2 (iii) Level of Income (Y) = Rs. 4,000 crore (iv) Autonomous Consumption Expenditure (c̄) = Rs. 50 crore (b) State the meaning of propensity to consume.

Question

Accepted Answer

**Given:**
- Autonomous Investment (I₀) = ₹100 crore
- Marginal Propensity to Save (MPS) = 0.2
- Level of Income (Y) = ₹400 crore

**Step 1: Calculate MPC**
MPC = 1 - MPS = 1 - 0.2 = 0.8

**Step 2: Calculate Consumption Function**
We need autonomous consumption (C̄). From the chapter, at Y = 0, C = 40 (autonomous consumption).
C = C̄ + bY = 40 + 0.8Y

**Step 3: Calculate AD**
AD = C + I
AD = (40 + 0.8 × 400) + 100
AD = (40 + 320) + 100
AD = 360 + 100
AD = ₹460 crore

**Answer: Aggregate Demand (AD) = ₹460 crore**