In a two-sector economy, C = C̄ + 0.8Y and investment is autonomous. At the equilibrium, income is Rs 600 crore and total saving is Rs 60 crore. What are autonomous consumption and autonomous investment?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Autonomous consumption Rs 60 crore; investment Rs 60 crore
At equilibrium, Y = C + {IB}. So saving, S = Y − C, equals {IB}. This gives investment first, and then autonomous consumption from the equilibrium income.
Given:
c = 0.8, Y = 600, S = 60
Investment: S = Y − C = Ī, so Ī = 60
Equilibrium: Y = (C̄ + Ī) / (1 − c), so 600 = (C̄ + 60) / 0.2
C̄ + 60 = 120, so C̄ = 60
Check: S = −C̄ + 0.2Y = −60 + 120 = 60
Option (1) Autonomous consumption Rs 120 crore; investment Rs 60 crore — Incorrect. With these values, Y = 180 / 0.2 = 900, not 600.
Option (2) Autonomous consumption zero; investment Rs 120 crore — Incorrect. This gives Y = 600, but saving would be 0.2 × 600 = 120, not 60.
Option (4) Autonomous consumption Rs 60 crore; investment Rs 120 crore — Incorrect. With these values, Y = 180 / 0.2 = 900, not 600.
NCERT (2026-27): “4.1.1 Consumption … Let us also look at another dimension of this, savings. Savings is that part of income that is not consumed. … We define the marginal propensity to save (MPS) as the rate of change in savings as income increases. …” “4.2 Determination of Income in Two-sector Model If the final goods market is in equilibrium this can be written as |