Calculate equilibrium level of income for a hypothetical economy for which it is given that : (i) Autonomous Investment (I_0) = Rs. 10,000 crores, and (ii) Consumption Function; C = 2000 + 0.75Y; where C = Consumption and Y = Income. Calculate, Change of Income (ΔY) for a hypothetical economy, for which it is given that : (i) Change in Investment (ΔI) = 5,000 crores. (ii) Marginal Propensity to Consume (MPC) = 0.75.

Question

Accepted Answer

Given: Autonomous Investment (I₀) = ₹10,000 crores, Consumption Function: C = 2000 + 0.75Y
MPC (b) = 0.75
At equilibrium, Y = C + I
Y = 2000 + 0.75Y + 10000
Y = 12000 + 0.75Y
Y - 0.75Y = 12000
0.25Y = 12000
Y = 12000 / 0.25
Y = ₹48,000 crores
The equilibrium level of income is ₹48,000 crores.