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

Hint:

In an economy at equilibrium, Investment (I) can be calculated by subtracting Consumption (C) from National Income (Y).

Answer 1

- 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.