Assuming for a hypothetical economy : (i) Autonomous Consumption Expenditure (c-bar) = Rs. 250 crore (ii) Marginal Propensity to Save (MPS) = 0.2 (iii) Autonomous Investments (I_0) = Rs. 200 crore Estimate the Break-even level of Income and Equilibrium level of Income, on the basis of information given above.

Question

Accepted Answer

Given: Autonomous Consumption (c̄) = ₹250 crore, MPS = 0.2, Autonomous Investments (I₀) = ₹200 crore

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

Step 2: Calculate Total Autonomous Expenditure
Ā = c̄ + I₀ = 250 + 200 = ₹450 crore

Step 3: Calculate Equilibrium Income
Y = Ā/(1-MPC) = 450/0.2 = ₹2,250 crore

Step 4: Calculate Consumption at equilibrium
C = c̄ + bY = 250 + 0.8(2250) = 250 + 1800 = ₹2,050 crore

Step 5: Calculate Saving at equilibrium
S = Y - C = 2250 - 2050 = ₹200 crore
Or using S = I at equilibrium: S = ₹200 crore

Step 6: Calculate Multiplier
k = 1/(1-MPC) = 1/0.2 = 5

The equilibrium income is ₹2,250 crore, consumption is ₹2,050 crore, saving is ₹200 crore, and the multiplier is 5.