Question

Calculate Investment expenditure from the following data about an economy that is in equilibrium.

National Income = Rs 1,000

Marginal Propensity to Save = 0.20

Autonomous consumption expenditure = Rs 100

Options

• 100

• 200

• 600

• 50

Answer 1

100

Explanation:

Given, National Income (Y) = 1,000,

Marginal Propensity to Save (MPS) = 0.20,

Autonomous Consumption = 100

MPC or b = 1 − MPS= 1 − 0.20 = 0.80

Y = C + I

C = C⁻ + b(Y)

∴ Y = C⁻ + b(Y) + I

∴ On substituting the given variables above, we get

1,000 = 100 + 0.80 × 1,000 + 11,000 = 100 + 0.80 × 1,OOO + II= 1000 − 900 = 100

i.e. Investment = Rs 100