Calculate equilibrium level of income for a hypothetical economy for which it is given that : (i) Autonomous Investment (I_O) = Rs. 20,000 crores, and (ii) Consumption function; C = 4000 + 0.8Y Where C = Consumption and Y = Income. Calculate, change of income (ΔY) for a hypothetical economy, for which it is given that : (i) Marginal Propensity to Save (MPS) = 0.25, and (ii) Change in Investments (ΔI) = Rs. 10,000 crores.

Question

Accepted Answer

Given: Autonomous Investment (I₀) = ₹20,000 crores, Consumption Function: C = 4000 + 0.8Y
MPC (b) = 0.8
At equilibrium, Y = C + I
Y = 4000 + 0.8Y + 20000
Y = 24000 + 0.8Y
Y - 0.8Y = 24000
0.2Y = 24000
Y = 24000 / 0.2
Y = ₹1,20,000 crores
The equilibrium level of income is ₹1,20,000 crores.