In an economy, equilibrium income is Rs 400 crore when autonomous investment is Rs 40 crore, and Rs 480 crore when autonomous investment is Rs 60 crore. The consumption function is C = C̄ + cY. What is the autonomous consumption, C̄?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 60 crore
Two equilibria give the multiplier: the change in income ÷ the change in investment. With the multiplier known, Y = k(C̄ + Ī) gives the autonomous consumption.
Given:
Ī = 40 gives Y = 400
Ī = 60 gives Y = 480 (Rs crore)
\( \displaystyle k = \frac{480 - 400}{60 - 40} = \frac{80}{20} = 4 \)
\( \displaystyle 400 = 4 \times (\bar{C} + 40) \)
\( \displaystyle \bar{C} + 40 = 100 \)
\( \displaystyle \bar{C} = 60 \)
Autonomous consumption is Rs 60 crore. A multiplier of 4 means c = 0.75, and 480 = 4 × (60 + 60) checks the answer.
NCERT (2026-27): “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. …” “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
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