The saving funciton of an economy is S = –200 + 0.25Y. The economy is in equilibrium when income is equal to 2000. Calculate (a) Investment expenditure at equilibrium level of income. (b) Autonomous consumption.

Solution

(a)For equilibrium level of income Planned Savings (S) = Planned Investment (I) Substituting the values of Y and saving function

straight S space equals space minus 200 plus 0.25 cross times 2000 space space space space equals space minus 200 space plus space 1 fourth cross times 2000 space space space space equals space 300

Investment expenditure (I) = S = 300 (At equilibrium I = S)
(b) Income = Consumption + Saving
Autonomous consumption means the level of consumption expenditure when income is zero. In the given equation when Y (income) is zero, S = – 200. So, Autonomous consumption is 200 because dissaving of –200 needs to take place to finance autonomous consumption.

Some More Questions From Determination of Income and Employment Chapter

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Determination Of Income And Employment

The saving funciton of an economy is S = –200 + 0.25Y. The economy is in equilibrium when income is equal to 2000. Calculate (a) Investment expenditure at equilibrium level of income. (b) Autonomous consumption.

Some More Questions From Determination of Income and Employment Chapter

What are the types of Propensity to consume?

How does MPC affect level of income?

Distinguish between APC and MPC, The value of which of APC and MPC can be greater than one and when?

State relationship between income and saving.

What is saving function (or Propensity to save)?

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