Suppose, an economy is in equilibrium. From the following data, calculate Investment Expenditure in the economy : (i) National Income = Rs. 10,000 crore (ii) Marginal Propensity to Save(MPS) = 0.2 (iii) Autonomous Consumption (c̄) = Rs. 200 crore "With the objective to correct deflation, Reserve Bank of India may decrease Repo-rate." Discuss the rationale behind the step taken by the Reserve Bank of India (RBI).

Question

Accepted Answer

Given: National Income (Y) = ₹10,000 crore, MPS = 0.2

At equilibrium, S = I

Saving Function: S = -c̄ + MPS × Y
S = -c̄ + 0.2 × 10000
S = -c̄ + 2000

At equilibrium: S = I
I = -c̄ + 2000

We need autonomous consumption (c̄). Using the consumption function:
MPC = 1 - MPS = 1 - 0.2 = 0.8
C = c̄ + 0.8Y
Y = C + I
10000 = c̄ + 0.8(10000) + I
10000 = c̄ + 8000 + I
I = 2000 - c̄

If we assume autonomous consumption is given (e.g., c̄ = 500):
I = 2000 - 500 = ₹1,500 crore

The investment expenditure depends on the autonomous consumption value. If c̄ = ₹500 crore, then I = ₹1,500 crore.