Q22 of 31 Page 1

If in an economy saving function is given by S = (-) 50 + 0.2 Y and Y = 2000 crores; consumption expenditure for the economy would be 1,650 crores and the autonomous investment is 50 crores and the marginal propensity to consume is 0.8. True or False? Justify your answer with proper calculations.

OR


“Economists are generally concerned about the rising Marginal Propensity to Save (MPS) in an economy”. Explain why?


S = -50+0.2Y


Y = 2000


C = 1650


I = 50


MPC = 0.8


S = -50 + (0.2*2000)


= -50+400 = 350


At equilibrium, Y=C+S and MPC+MPS = 1


Y = 1650+350 = 2000


MPC+MPS = 0.8+0.2 = 1


Thus all the values are correct.


OR


Savings is the remaining portion of the income after consumption. The saving function determines the level of savings according to each level of income. MPS determines the ratio of changes in savings to the changes in income.


MPS = changes in savings/changes in income


Economists are generally concerned about the rising Marginal Propensity to Save (MPS) in an economy. The major reason for this is that the value of the investment multiplier is inversely related to the MPS. The investment multiplier shows the number of times the income will get multiplied with a small initial change in the investment. According to Keynes, when there is an increment of investment, income will be increased by an amount that is K times the increase in investment. Thus, K is the investment multiplier.


K= 1/1-MPC


The value of the investment multiplier is determined by the value of Marginal Propensity to Consume (MPC) and MPS. The size of the multiplier directly varies with the value of MPC. Thus higher the MPC, higher will be the size of the multiplier and vice-versa. When MPS rises, the investment multiplier would be inversely affected. As the value of MPS rises, the money available for the circulation and multiplication will be reduced considerably. Thus the multiplier process will be negatively affected by the increased savings.


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