If MPC is one-fourth of MPS and consumption at zero level of national income is ₹ 50 crore, derive the consumption and saving function.
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Given, $\text{MPC}=\frac{1}{4}\text{MPS}$$\text{MPC}=0.25\ \text{MPS}\ ...(1)$
We know: MPC + MPS = 1 ....(2) Putting value of MPC from (1) in (2), we get;$0.25\ \text{MPS}+\text{MPS}=1$
$1.25\ \text{MPS}=1$
$\text{MPS}=\frac{1}{1.25}=0.8$
(Alternately: MPC = 1 - MPS = 1 - 0.8 = 0.2) Consumption function is given as,$\text{C}=\bar{\text{C}}+\text{b}(\text{Y})$
Aoutonomous Consumption $(\bar{\text{C}})=₹ \ 50$ crore and b or MPC = 0.2. Putting the values of b and $\bar{\text{C}}$ in the Consumption function, we get; C = 50 + 0.2(Y) Saving function is given as, $\text{S}=-\bar{\text{C}}+(1-\text{b})\text{Y},$ Putting the values of (1 - b) or MPS and $-\bar{\text{C}},$ we get; S = -50 + 0.8(Y).
We know: MPC + MPS = 1 ....(2) Putting value of MPC from (1) in (2), we get;$0.25\ \text{MPS}+\text{MPS}=1$
$1.25\ \text{MPS}=1$
$\text{MPS}=\frac{1}{1.25}=0.8$
(Alternately: MPC = 1 - MPS = 1 - 0.8 = 0.2) Consumption function is given as,$\text{C}=\bar{\text{C}}+\text{b}(\text{Y})$
Aoutonomous Consumption $(\bar{\text{C}})=₹ \ 50$ crore and b or MPC = 0.2. Putting the values of b and $\bar{\text{C}}$ in the Consumption function, we get; C = 50 + 0.2(Y) Saving function is given as, $\text{S}=-\bar{\text{C}}+(1-\text{b})\text{Y},$ Putting the values of (1 - b) or MPS and $-\bar{\text{C}},$ we get; S = -50 + 0.8(Y).
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