Suppose the following information is given about a hypothetical economy : C = 200 + 0.75 Y (where, C = Consumption and Y = Income) I_0 = 300 (I_0 = Autonomous Investment) Calculate the following on the basis of the given information : (a) Equilibrium Level of Income (b) Aggregate Demand at Equilibrium Level of Income (c) Marginal Propensity to Save

Question

Accepted Answer

Given: C = 200 + 0.75Y, I₀ = 300

(i) Equilibrium level of income:
At equilibrium, Y = C + I
Y = 200 + 0.75Y + 300
Y = 500 + 0.75Y
Y - 0.75Y = 500
0.25Y = 500
Y = 500 / 0.25
Y = ₹2,000 crores

(ii) Consumption at equilibrium:
C = 200 + 0.75(2000)
C = 200 + 1500
C = ₹1,700 crores

(iii) Saving at equilibrium:
S = Y - C = 2000 - 1700 = ₹300 crores
Or using S = I at equilibrium: S = ₹300 crores

(iv) Investment Multiplier:
k = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4

The multiplier value is 4, indicating that income changes by 4 times any change in investment.