Example 26
The saving function of an economy is S = - 200 + 0.25Y. The economy is in Solarium level when income is equal to 2,000. Calculate:
- Investment expenditure at equilibrium of income;
- Autonomous consumption;
- Investment multiplier.
View answer
It is given in question that
Income earned is 2000
Savings Function is
S=-200+0.25Y
S=-200+0.25*2000
S=-200+500
S=300
(a)
We know that
At equilibrium level of Income
Savings=Investment
300=Investment
Investment =300
(b)
Now, we have to calculate Autonomous Consumption Expenditure
We know that
Autonomous Consumption = Consumption Exp if Income is 0
If Income is 0
S=-200+0.25Y
S=-200+0.25*0
S=-200+0
S=-200
Savings=-200
Now, Income-Consumption=Savings
Income-Consumption=Savings
Income-Savings =Consumption
0--200=Consumption
0+200=Consumption
Consumption =200
Hence, Autonomous consumption=200
(c )
We know that
Savings Function is given by
S=-Ĉ +(1-b)Y
where
Ĉ = Autonomous Consumption
b=MPC
Y = income
In our case
Savings Function is
S=-200+0.25Y
Hence,
1-b =0.25
1-0.25=b
0.75=b
b=0.75
Hence, MPC =0.75
Now, lets calculate Investment Multiplier k
K = 1
1-MPC
K = 1
1-0.75
K = 1
0.25
K = 1*100
25
K = 100
25
K = 4
Example 27
If saving function for an economy is given as: S = when - 500 + 0.2Y will and become investment expenditure is ₹ 100 crores, then determine:
- Level of income when saving will become zero
- Level of income when saving is equal to investment.
View answer
Savings Function is given by
S=-500+0.2Y
(i)
We need to find level of Income where Savings =0
S=-500+0.2Y
0=-500+0.2Y
0+500=0.2Y
500=0.2Y
500/0.2=Y
500/2*10=Y
250*10=Y
2500 =Y
Y=2500
(ii)
We need to find level of Income where Savings =Investment
This happens at Equilibrium level of Income
S=-500+0.2Y
I=-500+0.2Y
100=-500+0.2Y
100+500 =0.2Y
600=0.2Y
600/0.2 = Y
600*10/2=Y
6000/2=Y
3000=Y
Y=3000
What is Break Even level of Income?
It is level of income where we are earning enough to meet out consumption
Hence at this level
Income = Consumption
Note
Savings are 0 at this level
Example 28
The equilibrium level of income in an economy is ₹ 5,000 crores. The autonomous consumption expenditure is equal to ₹ 250 crores and investment expenditure ₹ 1,000 crores Calculate:
- Consumption expenditure at equilibrium level of national income;
- Marginal Propensity to save;
- Saving Function;
- Investment Multiplier;
- Break-even level of Income.
View answer
Given that
equilibrium Level of Income = 5000
Investment = 1000
Ĉ = Autonomous Consumption = 250
We know that
At Equilibrium Level of income
Savings = Investment
Savings=1000
(i)
Now,
Consumption =Income-Savings
Consumption =5000-1000
Consumption =4000
(ii)
C =Ĉ +b(Y)
4000 = 250 + b5000
3750/ 5000 = b
b = 3/4
b = MPC = 0.75
MPC + MPS = 1
MPS + 0.75 = 1
MPS = 0.25
(iii)
S=-250+0.25Y
(iv)
Investment Multiplier = K = 1/ 1 - MPC
K = 1/ 1 - 0.75
K = 1/0.25
K = 4
(v)
At break even point,
Y = C
Y = 250 + 0.75Y
0.25Y = 250
Y = 1000
Example 32
The saving function of an economy is given as: S = - 25 + 0-25 Y. If the planned investment is ₹ 200 crores, calculate the following:
- Equilibrium level of income in the economy.
- Aggregate demand at income of ₹ 500 crores.
View answer
(a)
Given that
Savings Function is S = -25 + 0.25Y
Investment =200
We know that
At Equilibrium Level of income
Savings=Investment
S=1000
-25+0.25Y=200
0.25Y=200+25
0.25Y=225
Y=225/.25
Y=225*100/25
Y=225*4
Y=900
(b)
Aggregate Supply =Consumption + Saving
AS=C+S
Y=C+S
In this case,
Y =500
S=-25+0.25Y
S=-25+0.25*500
S=-25+125
S=100
Y=C+S
500=C+100
500-100=C
400=C
C=400
We know that
Aggregate Demand =Consumption Expenditure + Investment Expenditure
AD=C+I
AD=400+200
AD=600
Example 33
The saving function of an economy is given as: S = (-) 10 + 0-20 Y. If the ex-ante investments are ₹ 240 crores,
calculate the following:
- Equilibrium level of income in the economy.
- Additional investments which will be needed to double the present level of equilibrium income.
View answer
(i)
We know that
At equilibrium level of Income
Savings =Investment
S=I
S=240
-10+0.20Y=240
0.20Y=240+10
0.20Y=250
Y=250/0.20
Y=250*100/20
Y=25000/20
Y=1250
(ii)
Now, Current equilibrium Income =1250
New equilibrium Income =1250*2=2500
Savings Function is
S=-10+0.2Y
S=-10+0.2*2500
S =490
At equilibrium level of Income
Savings =Investment
490 = investment
Investment = 490
Additional Investment = New Investment = Existing Investment
Additional Investment = 490 - 240
Additional Investment = 250
NCERT Questions
No questions in this part
Other Books
Question 1
The function of saving (S) is given to be: S = -40 + 0.25Y.
If planned investments are Rs100 crores, determine:
- Equilibrium level of income;
- Level of consumption at equilibrium;
- Savings at equilibrium
View answer
Given, I = 100
S = -40 + 0.25Y
(a)
At equilibrium level
S = I
100 = -40 + 0.25Y
140/ 0.25 = Y
Y = 560
(b)
C = 40 + bY
C = 40 + 0.75(560)
C = 40 + 420
C = 460
(c)
S = -40 + 0.25Y
S = -40 + 0.25(560)
S = -40 + 140
S = 100
Question 2
The saving function of an economy is given as: S = -50 + 0.4Y.
The economy is in equilibrium at the income level of Rs 1,500 crores.
Calculate:
- Investment at equilibrium income level;
- Autonomous consumption;
- Multiplier
View answer
Given,
Y = 1500
S = -50 + 0.4Y
(a)
S = -50 + 0.4(1500)
S = -50 + 600
S = 550
At equilibrium level
S = I
I = 550
(b)
S = -Ĉ + (1-b)Y
Given, S = -50 + 0.4(1500)
Here
Ĉ = Autonomous Consumption = 50
(c)
K = 1/ 1-MPC
K = 1/0.4
K = 2.5