Suppose an economy is in equilibrium. From the following data, calculate Investment Expenditure in the economy : (i) National Income = Rs. 40,000 crore (ii) Marginal Propensity to Consume (MPC) = 0.8 (iii) Autonomous Consumption (c̄) = Rs. 100 crore "With the objective to correct deflation, Reserve Bank of India may decrease the Bank rate." Discuss the rationale behind the step taken by the Reserve Bank of India (RBI).

Question

Accepted Answer

Given: National Income (Y) = ₹40,000 crore, MPC = 0.8

At equilibrium, Y = C + I
We know: C = c̄ + bY
Y = c̄ + bY + I
I = Y - c̄ - bY
I = Y(1-b) - c̄

We need autonomous consumption (c̄). Using the consumption function:
C = c̄ + 0.8Y
At equilibrium: Y = C + I
40000 = c̄ + 0.8(40000) + I
40000 = c̄ + 32000 + I
I = 8000 - c̄

Alternatively, using S = I at equilibrium:
S = Y - C = Y - (c̄ + bY) = -c̄ + (1-b)Y
S = -c̄ + 0.2(40000) = -c̄ + 8000
At equilibrium: S = I
I = -c̄ + 8000

If we assume autonomous consumption is given (e.g., c̄ = 2000):
I = -2000 + 8000 = ₹6,000 crore

The investment expenditure depends on the autonomous consumption value. If c̄ = ₹2,000 crore, then I = ₹6,000 crore.