Q21 of 25 Page 1

The value of marginal propensity to consume is 0.6 and initial income in the economy is Rs 100 crores. Prepare a schedule showing Income, Consumption, and Saving. Also, show the equilibrium level of income by assuming an autonomous investment of Rs 80 crores.

MPC = 0.6


Initial investment = 100 crores


Multiplier (K) = 1/1MPC


= 1/1-0.6


= 1/0.4 = 2.5


































INCOME



CONSUMPTION (Income*MPC)



SAVINGS (Income – Consumption)



100 crores



60 crores



40 crores



200 crores



120 crores



80 crores



300 crores



180 crores



120 crores



400 crores



240 crores



160 crores



500 crores



300 crores



200 crores



At equilibrium C+I = C+S


Thus I=S


I=S in the economy when the income level is 200 crores. At 200 crores, the level of savings equal the level of investment; both being equal to 80 crores.


Thus, the equilibrium level of income in the economy is 200 crores


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