"In an economy, the autonomous consumption is 100 and Marginal Propensity to Consume (MPC) is 0.6. If the equilibrium level of Income is 2,000, then the autonomous investment is 300." Justify the statement with valid calculation. An Economy is in equilibrium, calculate the Marginal Propensity to Save (MPS) from the following : (i) National Income (Y) = 4,400 (ii) Autonomous Consumption (C_bar) = 1,000 (iii) Investment Expenditure (I) = 70

Question

Accepted Answer

Given: Autonomous Consumption (c̄) = 100, MPC = 0.6, Equilibrium Income (Y) = 2,000

At equilibrium: Y = C + I
Y = c̄ + bY + I₀
2000 = 100 + 0.6(2000) + I₀
2000 = 100 + 1200 + I₀
2000 = 1300 + I₀
I₀ = 2000 - 1300
I₀ = 700

The statement claims autonomous investment is 300, but the calculation shows it should be 700. Therefore, the statement is incorrect. With the given parameters, autonomous investment must be ₹700 crores for the economy to be in equilibrium at Y = ₹2,000 crores.