(I) Estimate the value of subsistence level of consumption expenditure from the following data, about an economy which is in equilibrium : (i) National Income (Y) = Rs. 1,500 crore (ii) Marginal Propensity to Consume (MPC) = 0.8 (iii) Investment Expenditure (I) = Rs. 150 crore (II) "An economy facing unplanned accumulation of inventories would try to increase its Aggregate Demand." Defend or refute the given statement with valid arguments. (I) Complete the following table : (II) Identify the monetary measure being referred to each of the following and discuss whether the tool would be used during a situation of excess demand or deficient demand. (i) Buying government securities (G-Sec) from public. (ii) Discourage commercial banks to park their surplus funds with the Reserve Bank of India (RBI).

Question

Accepted Answer

Given: Y = ₹1,500 crore, MPS = 0.2, I₀ = ₹400 crore

At equilibrium: S = I
Saving Function: S = -c̄ + MPS × Y
S = -c̄ + 0.2 × 1500
S = -c̄ + 300

At equilibrium: S = I
400 = -c̄ + 300
c̄ = -100

This gives a negative autonomous consumption, which is unusual. Let me recalculate using the consumption approach:

MPC = 1 - MPS = 1 - 0.2 = 0.8
C = c̄ + 0.8Y
Y = C + I
1500 = c̄ + 0.8(1500) + 400
1500 = c̄ + 1200 + 400
1500 = c̄ + 1600
c̄ = -100

The subsistence level of consumption expenditure is -₹100 crore. This negative value suggests that at the given equilibrium, the economy is in a situation where consumption is less than what would be expected from the income level alone.

Note: A negative autonomous consumption is theoretically unusual and may indicate that the given data points are not consistent with standard consumption function assumptions.