(I) Estimate the value of subsistence level of consumption expenditure from the following data about an economy which is in equilibrium : (i) National Income (Y) = Rs. 1,200 crore (ii) Marginal Propensity to Save (MPS) = 0.20 (iii) Investment Expenditure ( I ) = Rs. 100 crore (II) "An economy facing an increase in unintended accumulation of inventories would try to reduce Aggregate Demand." Defend or refute the above statement with valid arguments. (I) Complete the following table : (II) Identify the monetary measures being referred to in the following statements. Discuss whether the tool would be used during a situation of excess demand or deficient demand. (i) Selling off government securities (G-Sec) to public by the central bank. (ii) Encourage commercial banks to park their surplus funds with the Reserve Bank of India (RBI).

Question

Accepted Answer

Given: Y = ₹1,200 crore, MPS = 0.25, I₀ = ₹300 crore

At equilibrium: S = I
Saving Function: S = -c̄ + MPS × Y
S = -c̄ + 0.25 × 1200
S = -c̄ + 300

At equilibrium: S = I
300 = -c̄ + 300
c̄ = 0

Wait, this gives c̄ = 0, which is unusual. Let me recalculate using the consumption approach:

MPC = 1 - MPS = 1 - 0.25 = 0.75
C = c̄ + 0.75Y
Y = C + I
1200 = c̄ + 0.75(1200) + 300
1200 = c̄ + 900 + 300
1200 = c̄ + 1200
c̄ = 0

Subsistence level of consumption expenditure is ₹0 crore. This means at the given equilibrium, autonomous consumption is zero, indicating that all consumption is induced by income.

Note: The subsistence level typically refers to the minimum consumption needed for survival. In this case, the data suggests that at Y = ₹1,200 crore, the economy is at a point where autonomous consumption is zero.