Question

Consider the economy described by the following: \[ Y = C + I + G \quad \text{with} \quad Y = 5000, \, G = 1000, \, T = 1000, \quad \text{and} \quad C = 250 + 0.75(Y - T), \] where \( Y \), \( C \), \( I \), \( G \), and \( T \) are national income, private consumption spending, investment expenditure, government expenditure, and tax revenue respectively. In this economy, private saving is ............

Hint:

Private saving is calculated as the difference between national income after taxes and consumption.

Answer 1

We are given the consumption function: \[ C = 250 + 0.75(Y - T) \] Substitute the values of \( Y = 5000 \) and \( T = 1000 \): \[ C = 250 + 0.75(5000 - 1000) = 250 + 0.75(4000) = 250 + 3000 = 3250 \] Now, national income \( Y \) is the sum of consumption \( C \), investment \( I \), and government expenditure \( G \): \[ Y = C + I + G \] Given \( Y = 5000 \), \( G = 1000 \), and \( I \) is the unknown, we can solve for \( I \): \[ 5000 = 3250 + I + 1000 \Rightarrow I = 5000 - 3250 - 1000 = 750 \] Private saving is defined as the difference between private income and private consumption: \[ \text{Private Saving} = Y - T - C = 5000 - 1000 - 3250 = 750 \] Thus, private saving is Rs. 750. Final Answer: \[ \boxed{750} \]