In an economy ; C = 200 + 0.75 Y (where C is consumption expenditure and Y is National Income). Investment expenditure is Rs. 4,000 Crore. Calculate the following : (i) Equilibrium level of income. (ii) Total consumption expenditure at equilibrium income level. Explain the adjustment mechanism in case ex-ante savings are greater than ex-ante investments.

Question

Accepted Answer

Given: C = 200 + 0.75Y, I₀ = ₹4,000 Crore

(i) Equilibrium level of income:
At equilibrium, Y = C + I
Y = 200 + 0.75Y + 4000
Y = 4200 + 0.75Y
Y - 0.75Y = 4200
0.25Y = 4200
Y = 4200 / 0.25
Y = ₹16,800 Crore

(ii) Consumption at equilibrium:
C = 200 + 0.75(16800)
C = 200 + 12600
C = ₹12,800 Crore

(iii) Saving at equilibrium:
S = Y - C = 16800 - 12800 = ₹4,000 Crore
Or using S = I at equilibrium: S = ₹4,000 Crore

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

The multiplier value is 4, indicating that any change in investment will cause a 4-fold change in national income.