The saving function of an economy is S = −30 + 0.2Y (Rs crore) and autonomous investment is Rs 50 crore. What is the consumption expenditure at the equilibrium level of income?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs 350 crore
Income is either consumed or saved, so C = Y − S. This turns the saving function into a consumption function. Then find equilibrium income and the consumption there.
Given:
S = −30 + 0.2Y
Ī = 50 (Rs crore)
\( \displaystyle C = Y - (-30 + 0.2Y) = 30 + 0.8Y \)
\( \displaystyle Y^{*} = \frac{30 + 50}{1 - 0.8} = \frac{80}{0.2} = 400 \)
\( \displaystyle C = 30 + 0.8 \times 400 = 350 \)
Consumption at equilibrium is Rs 350 crore. As a check, saving at 400 is −30 + 80 = 50, which equals investment.
Option (1) Rs 400 crore — this is the income itself, not consumption.
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 … 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. …” |