Question:
Suppose, an economy is in equilibrium. From the following data, calculate investment expenditure in the economy:
Given:
National Income (Y) = 10,000 crore
Marginal Propensity to Consume (MPC) = 0.8
Autonomous Consumption (C) = 100 crore
Suppose, an economy is in equilibrium. From the following data, calculate investment expenditure in the economy:
Given:
National Income (Y) = 10,000 crore
Marginal Propensity to Consume (MPC) = 0.8
Autonomous Consumption (C) = 100 crore
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In an economy at equilibrium, Investment (I) can be calculated by subtracting Consumption (C) from National Income (Y).
Updated On: Feb 1, 2025
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Solution and Explanation
- In equilibrium, National Income (Y) is equal to the total expenditure, which includes consumption and investment. Hence,
\[
Y = C + I
\]
- Consumption (C) can be expressed as:
\[
C = C_0 + MPC \times Y
\]
where \( C_0 \) is autonomous consumption.
\[
C = 100 + 0.8 \times 10,000 = 100 + 8,000 = 8,100 \, {crore}
\]
- Now, substitute into the equilibrium equation:
\[
Y = C + I \Rightarrow 10,000 = 8,100 + I
\]
Solving for investment:
\[
I = 10,000 - 8,100 = 1,900 \, {crore}
\]
Conclusion:
The investment expenditure in the economy is Rs. 1,900 crore.
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