Question

Assuming the following for a hypothetical economy, estimate the Break-even level of Income and Equilibrium level of Income:
[(i)] Autonomous Consumption Expenditure ($\bar{C}$) = ₹ 50 crore
[(ii)] Marginal Propensity to Save (MPS) = 0.2
[(iii)] Autonomous Investments ($I_0$) = ₹ 100 crore

Hint:

At break-even, income equals autonomous consumption, and equilibrium income can be calculated using the formula: \[ Y = \frac{\bar{C} + I_0}{MPS} \] Make sure to plug in correct values and check units to avoid mistakes in calculation.

Answer 1

1. Break-even Level of Income:
At the break-even point, Income (Y) = Consumption (C)
Given: Autonomous Consumption Expenditure ($\bar{C}$) = ₹ 50 crore
At break-even point, no savings means: \[ Y = C = \bar{C} \] \[ \text{Break-even Level of Income} = ₹ 50 \text{ crore} \] 2. Equilibrium Level of Income:
We know that: \[ \text{Equilibrium Income (Y)} = \frac{\bar{C} + I_0}{MPS} \] Substituting the given values: \[ Y = \frac{50 + 100}{0.2} \] \[ Y = \frac{150}{0.2} \] \[ Y = 750 \text{ crore} \] Therefore, the Equilibrium Level of Income is ₹ 750 crore.