The equilibrium level of income in an economy is Rs. 5,000 crores. The autonomous consumption expenditure is equal to Rs.250 crores and investment expenditure Rs. 1,000 crores. Calculate : ("i) Consumption expenditure at equilibrium level of national income, (ii) Marginal Propensity to save, (iii) Saving Function , (iv) Investment Multiplier , (v) Break -even level of Income.

Explanation

("i) Consumption expenditure at equilibrium level of national income .
Or , C+l =Y `[:'AD=C+l]`
Putting value of Investment Expenditure (l) of Rs. 1,000 and income (Y) of Rs. 5,000, we get:
C=5,000- 1,000
C= Rs. 4,000 crores (ii)Marginal Propensity to save (MPS)
Consumption Function is given as : C=c+B(Y)
Putting the values of C, c and Y in the consumption function , we get:
`4,000 = 250 + 5,000b`
`5,000b = 3,750`
b or MPC `= 0.75`
MPS =1- MPC `=1- 0.75 = 0.25`
Saving Function is given as : S `=- c+ (1-b)Y`
Putting the valuse of (1-b) or MPS and - c, we get : S`= -0.25(Y)`
Investment Multiplier
Investment Multiplier (k) `= (1)/(MPS)=(1)/(0.25)=4`
Break - even point , C= Y
Putting Y= C in consumption. we get:
`=250+ 0.75Y`
` 0.25Y =250`
Y `= 1,000`
Break - even level of Income = Rs. 1,000 crores