Example 24.
Given consumption function C= 100 + 0.75Y (where C=consumption expenditure and Y = national income)
and investment expenditure ₹ 1,000, calculate: C = consumption expenditure level
national income;(ii)Consumption expenditure at equilibrium level of national income .
View answer
(i)
It is given in question that
Consumption Function is
C=100+0.75Y
Suppose, Income =Y
Consumption =100+0.75y
Savings=Income-Consumption
Savings=y-(100+0.75y)
Savings=0.25y-100
We know that
At equilibrium level of Income
Savings=Investment
0.25y-100=1000
0.25y =1000+100
0.25y =1100
y =1100/0.25
y =1100*100/25
y =1100*4
y =4400
(ii)
Now, lets calculate Consumption Expenditure C
C=100+0.75Y
C=100+0.75*4400
C=100+3300
C=3400
Example 25.
In an economy, the consumption function is C = 500 + 0.75Y, where C is
consumption expenditure and Y is income. Calculate the equilibrium level of income and
consumption expenditure, when investment expenditure is 5,000.
View answer
It is given in question that
Consumption Function is
C = 200+0.5Y
Suppose, Income =Y
Consumption = 200 + 0.5Y
Savings = Income - Consumption
Savings= Y - (200 + 0.5Y)
Savings = 0.5Y - 200
At Y = 1500
Savings = 0.5(1500) - 200
Savings = 750 - 200
Savings = 550
Given,
Investment = 400
Now, at equilibrium level
Savings = Investment
but Savings = 550 is not equal to Investment = 400
So, the economy is not in equilibrium at income level of Rs1500
Example 29.
In an economy, the investment expenditure is ₹ 70 crores and consumption function
is C=60 + 0.80Y. (i) Determine the equilibrium level of income; (ii) Find the equilibrium income
"when planned investment expenditure is increased by ₹ 10 crores; (iii) Value of multiplier due" to increase in investment expenditure.
View answer
(i)
It is given in question that
Consumption Function is
C=60+0.8Y
Suppose, Income =Y
Consumption =60+0.8Y
Savings=Income-Consumption
Savings=y-(60+0.8y)
Savings=0.2y-60
We know that
At equilibrium level of Income
Savings=Investment
0.2y-60=70
0.2y =70+60
0.2y =130
y=130/0.2
y=130*10/2
y=1300/2
y=650
(ii)
Current Investment =70 crores
Investment Increase by 10 Crores
Total Investment =70+10=80 Crores
Now
At equilibrium level of Income also
Y = C + I
Y = 60 + 0.8Y + 80
0.2Y = 140
Y = 700
(iii)
Now
Investment Increased from 70 to 80
Increase in Investment =10 Crore
Income increased from 650 to 700 Crores
Increase In Income =50 Crores
k=Investment Multiplier=Change in Income/Change in Investment
k=50/10
k=50/10
K = 5
Example 34
calculate the value of Marginal Propensity to Consume (MPC), if in an economy, autonomous
consumption is RS 500 crores, ex-ante investment are RS 4,000 crores and equilibrium
level of Income of the economy is RS 18,00 crores.
View answer
We know that
At equilibrium level of Income
Savings =Investment
Savings =4000
Now,
Income=Savings + Consumption
18000=4000+Consumption
14000=Consumption
Consumption=14000
Now, we know that Consumption Function is represented by
C =Ĉ +b(Y)
where
C= Total Consumption =14000
Ĉ = Autonomous Consumption =500
Y=Income =18000
b=MPC(This we have to calculate)
Putting values
C =Ĉ +b (Y)
14000=500+b*18000
13500=b*18000
13500/18000=b
0.75=b
b=0.75
NCERT Questions
No questions in this part
Other Books
Question 1
In an economy, the consumption function is C=600 + 0.9Y, where C is consumption expenditure and Y is income.
Calculate equilibrium level of income and consumption expenditure, when investment expenditure is 500.
View answer
Given,
C = 600 + 0.9Y
I = 500
At equilibrium level of income
S = I = 500
S = -600 + 0.1Y
500 = -600 + 0.1Y
1100/0.1 = Y
Y = 11000
C = 600 + 0.9Y
C = 600 + 0.9(11000)
C = 600 + 9900
C = 10500