Question

Complete the following table. Construct/Express the Consumption function at ₹ 200 crore level of income. Income (Y) (in ₹ crore) Savings (in ₹ crore)…

Accepted Answer

(a) Income (Y) (in ₹ Crore) Saving (in ₹ Crore) Average Propensity to Consume (APC) Marginal Propensity to Save (MPS) --- --- --- --- 0 (-) 30 - - 100 0 1 0.3 200 30 0.85 0.3 300 60 0.8 0.3 Consumption function, C = c + bY C = 30 + 0.7Y Alternatively, Consumption at ₹ 200 crore level of income = ₹ 170. Working Note: At an income level of ₹ 200 crore, Marginal Propensity to Save (MPS) = 0.3 and Marginal Propensity to Consume (MPC) = 1 - MPS ⇒ 1 - 0.3 = 0.7 OR (b) In an economy, if ex-ante Aggregate Supply is less than ex-ante Aggregate Demand, it implies that households are planning to consume more than what the firms expected them to. This will lead to an unintended fall in inventories. To restore the desired level of inventories, producers may plan to expand production. As a result, there may be an increase in the level of output, employment and income in the economy.

Income (Y) (in ₹ crore)	Savings (in ₹ crore)	Average Propensity to Consume (APC)	Marginal Propensity to Save (MPS)
$\displaystyle 0$	(–) $\displaystyle 30$	–	–
$\displaystyle 100$	………..	$\displaystyle 1$	………..
$\displaystyle 200$	………..	$\displaystyle 0$·$\displaystyle 85$	………..
$\displaystyle 300$	………..	$\displaystyle 0$·$\displaystyle 8$	………..

Income (Y) (in ₹ Crore)	Saving (in ₹ Crore)	Average Propensity to Consume (APC)	Marginal Propensity to Save (MPS)
$\displaystyle 0$	(-) $\displaystyle 30$	-	-
$\displaystyle 100$	$\displaystyle 0$	$\displaystyle 1$	$\displaystyle 0.3$
$\displaystyle 200$	$\displaystyle 30$	$\displaystyle 0.85$	$\displaystyle 0.3$
$\displaystyle 300$	$\displaystyle 60$	$\displaystyle 0.8$	$\displaystyle 0.3$

Marking-scheme solution

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