The saving function of an economy is S `= - 200+ 0.25Y`. The economy is in equilibrium when income is equal to 2,000. Calculate: (a) Investment expenditure at equilibrium level of income , (b) Autonomous consumption , (c ) Investment multiplier.

Answer

Investment expenditure at equilibrium level of income = 300 ; (b) Autonomous consumption = 200; (c ) Investment multiplier = 4

Explanation

(a) Investment expenditure at equilibrium level of income
Given ,Equilibrium Level of Income (Y) = 2,000. Putting value of in saving function , we get :
S`= 200 + 2,000 = 300`
At equilibrium, Planned Saving (S) = Planned Investment (l). It means:
Investment expenditure (l) at equilibrium level of income =300
(b) Autonomouse consumption
We know, Consumption means the level of consumption expenditure when income is zero.
When Y= 0, Saving = - 2000 , So , autonomous consumption =200
{Alternately , autonomous consumption can also be calculated from saving function. We know, Saving function is expressed as : `S= -overline c+Y (1-b)`. It means, -200 indicates that autonomous consumption `overline((c)) = 200}`
(c ) Investment Multiplier
From the saving function , we know that MPS= 0.25
Investment Multiplier (k) `=(1)/(MPS)=(1)/(0.25)=4`