The value of marginal propensity to consume is 0.6 and initial income in the economy is ₹ 100 crores. Prepare a schedule showing Income, Consumption and Saving. Also show the equilibrium level of income by assuming autonomous investment of ₹ 80 crores.
CBSE DELHI - OUTSIDE DELHI - FOREIGN SET 2 2018
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MPC = 0.6 Autonomous Investment = ₹ 80 Crores Initial Income = ₹ 100 Crores Let us assume, Autonomous Consumption = ₹ 40 Crores Change in Income = ₹ 100 Crores.
At Equilibrium level of Income, Aggregate Demand (AD) = Aggregate Supply (AS)$\text{C}+\text{I}=\text{y}$
$\bar{\text{C}}+\text{by}+\text{I}=\text{y}$
$\Rightarrow\ 40+(0.6\times\text{y})+80=\text{y}$
$\Rightarrow\ 120+0.6\text{y}=\text{y}$
$\Rightarrow\ 120=\text{y}-0.6\text{y}\Rightarrow\ 120=0.4\text{y}$
$\Rightarrow\ \text{y}=\frac{120}{0.4}\times\Rightarrow\ \text{₹ }300\text{ Crores}$
| y | C | S | I | DC = MPC × 0.4 | AD = C + I |
| 100 | 40 + 60 = 100 | 0 | 80 | 0.6 × 100 = 60 | 180 |
| 200 | 100 + 60 = 160 | 0 | 80 | 0.6 × 100 = 60 | 240 |
| 300 | 160 + 60 = 220 | 0 | 80 | 0.6 × 100 = 60 | 300 |
| 400 | 220 + 60 = 280 | 0 | 80 | 0.6 × 100 = 60 | 360 |
| 500 | 280 + 60 = 340 | 0 | 80 | 0.6 × 100 = 60 | 420 |
| 600 | 340 + 60 = 400 | 0 | 80 | 0.6 × 100 = 60 | 480 |
| 700 | 400 + 60 = 460 | 0 | 80 | 0.6 × 100 = 60 | 540 |
$\bar{\text{C}}+\text{by}+\text{I}=\text{y}$
$\Rightarrow\ 40+(0.6\times\text{y})+80=\text{y}$
$\Rightarrow\ 120+0.6\text{y}=\text{y}$
$\Rightarrow\ 120=\text{y}-0.6\text{y}\Rightarrow\ 120=0.4\text{y}$
$\Rightarrow\ \text{y}=\frac{120}{0.4}\times\Rightarrow\ \text{₹ }300\text{ Crores}$
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