In an economy, consumption expenditure is Rs 200 crore when income is Rs 200 crore, and Rs 360 crore when income is Rs 400 crore. The consumption function is a straight line, and autonomous investment is Rs 60 crore. What is the equilibrium level of income?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 500 crore
First find c and autonomous consumption from the two points of the consumption line. Then use Y = (C̄ + Ī) ÷ (1 − c).
Given:
At Y = 200, C = 200 (Rs crore)
At Y = 400, C = 360
Autonomous investment, Ī = 60
\( \displaystyle c = \frac{\Delta C}{\Delta Y} = \frac{360 - 200}{400 - 200} = \frac{160}{200} = 0.8 \)
\( \displaystyle \bar{C} = 200 - 0.8 \times 200 = 40 \)
\( \displaystyle Y^{*} = \frac{40 + 60}{1 - 0.8} = \frac{100}{0.2} = 500 \)
Equilibrium income is Rs 500 crore.
Option (1) Rs 300 crore — this leaves out the autonomous consumption of 40.
NCERT (2026-27): “Some Definitions Marginal propensity to consume (MPC): it is the change in consumption per unit change in income. It is denoted by c and is equal to ΔC/ΔY.” “4.2 Determination of Income in Two-sector Model … This equation can be further simplified by adding up the two autonomous terms, C̄ and Ī, making it Y = Ā + c.Y where Ā = C̄ + Ī is the total autonomous expenditure in the economy. In reality, these two components of autonomous expenditure behave in different ways. C̄, representing subsistence consumption level of an economy, remains more or less stable over time. However, Ī has been observed to undergo periodic fluctuations. …” |