An economy is in equilibrium. From the following data, calculate the value of Autonomous Consumption. National Income = Rs. 5,000 crore Marginal Propensity to Save (MPS) = 0.2 Investment Expenditure = Rs. 800 crore

Question

Accepted Answer

Given: National Income (Y) = ₹5,000 crore, MPS = 0.2, Investment Expenditure (I) = ₹500 crore

At equilibrium, S = I = ₹500 crore

Saving Function: S = -c̄ + (1-b)Y
We know MPS = 1-b = 0.2

At equilibrium:
S = -c̄ + MPS × Y
500 = -c̄ + 0.2 × 5000
500 = -c̄ + 1000
c̄ = 1000 - 500
c̄ = ₹500 crore

Alternatively, using the consumption approach:
MPC = 1 - MPS = 1 - 0.2 = 0.8
C = c̄ + bY
Y = C + I
5000 = c̄ + 0.8(5000) + 500
5000 = c̄ + 4000 + 500
5000 = c̄ + 4500
c̄ = 500 crore

Autonomous Consumption = ₹500 crore.