Question

Assuming for a hypothetical economy:
[(i)] Autonomous Consumption Expenditure ($\bar{C}$) = ₹ 250 crore
[(ii)] Marginal Propensity to Save (MPS) = 0.2
[(iii)] Autonomous Investments ($I_0$) = ₹ 200 crore Estimate the Break-even level of Income and Equilibrium level of Income, on the basis of information given above.

Hint:

At break-even, income equals autonomous consumption, and equilibrium income can be found using the formula: \[ Y = \frac{\bar{C} + I_0}{MPS} \] Always remember to convert MPS correctly and add up autonomous values before dividing.

Answer 1

1. Break-even Level of Income:
At the break-even point, Income (Y) equals Consumption (C).
Given: Autonomous Consumption Expenditure ($\bar{C}$) = ₹ 250 crore.
At the break-even point, savings are zero, implying:
\[Y = C = \bar{C}\]\[\text{Break-even Level of Income} = ₹ 250 \text{ crore}\]2. Equilibrium Level of Income:
The formula for Equilibrium Income is:
\[\text{Equilibrium Income (Y)} = \frac{\bar{C} + I_0}{MPS}\]Substituting the provided values:
\[Y = \frac{250 + 200}{0.2}\]\[Y = \frac{450}{0.2}\]\[Y = 2250 \text{ crore}\]The Equilibrium Level of Income is ₹ 2250 crore.