Suppose the following information is given about a hypothetical economy : C = 300 + 0.8 Y (where, C = Consumption and Y = Income) I_0 = 200 (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 = 300 + 0.8Y, I₀ = 200

(i) Equilibrium level of income:
At equilibrium, Y = C + I
Y = 300 + 0.8Y + 200
Y = 500 + 0.8Y
Y - 0.8Y = 500
0.2Y = 500
Y = 500 / 0.2
Y = ₹2,500 crores

(ii) Consumption at equilibrium:
C = 300 + 0.8(2500)
C = 300 + 2000
C = ₹2,300 crores

(iii) Saving at equilibrium:
S = Y - C = 2500 - 2300 = ₹200 crores
Or using S = I at equilibrium: S = ₹200 crores

(iv) Investment Multiplier:
k = 1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5

The multiplier value is 5, meaning income changes by 5 times any change in investment.