Suppose the following information is given about a hypothetical economy : C = 100 + 0.75 Y (where, C = Consumption and Y = Income) I_0 = 200 (I_0 = Autonomous Investment) Calculate the following on the basis of the given information : (a) Equilibrium Level of Income (b) Aggregate Demand at Equilibrium Level of Income (c) Marginal Propensity to Save

Question

Accepted Answer

Given: C = 100 + 0.75Y, I₀ = 200

(i) Equilibrium level of income:
At equilibrium, Y = C + I
Y = 100 + 0.75Y + 200
Y = 300 + 0.75Y
Y - 0.75Y = 300
0.25Y = 300
Y = 300 / 0.25
Y = ₹1,200 crores

(ii) Consumption at equilibrium:
C = 100 + 0.75(1200)
C = 100 + 900
C = ₹1,000 crores

(iii) Saving at equilibrium:
S = Y - C = 1200 - 1000 = ₹200 crores
Or using S = I at equilibrium: S = ₹200 crores

(iv) Investment Multiplier:
k = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4

The multiplier value of 4 means that any change in investment will lead to a 4-fold change in income.