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Question
An economy is in equilibrium. From the following data about an economy calculate autonomous consumption.
1) Income = 500
2) Marginal propensity to save = 0.2
3) Investment expenditure = 800
Solution
Given that
Income (Y) = 5000
Marginal propensity to save (s) = 0.2
Therefore, marginal propensity to consume = 1 -0.2 =0.8
I= 800
As we know that
Y = C + I
C = Y -1
C = 5000 – 800 = 420
`C = bar(C) + cY`
`4200 = bar(C) + 0.8(5000)`
`bar(C) = 200`
Thus, autonomous consumption is 200.
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