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Economics · 2024 · 4 marks
CBSE 2024 · Region 1 · Set 1 · Q13
(a) Complete the following table. Construct/Express the Consumption function at ₹ 200 crore level of income. Income (Y) (in ₹ crore) Savings (in ₹…
Complete the following table. Construct/Express the Consumption function at ₹ $\displaystyle 200$ crore level of income.
| Income (Y) (in ₹ crore) | Savings (in ₹ crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (–) $\displaystyle 30$ | – | – |
| $\displaystyle 100$ | ……….. | $\displaystyle 1$ | ……….. |
| $\displaystyle 200$ | ……….. | $\displaystyle 0$·$\displaystyle 85$ | ……….. |
| $\displaystyle 300$ | ……….. | $\displaystyle 0$·$\displaystyle 8$ | ……….. |
“In an economy, ex-ante Aggregate Supply is less than ex-ante Aggregate Demand.”
Explain its impact on the level of output, income and employment.
Marking-scheme solution
| Income (Y) (in ₹ Crore) | Saving (in ₹ Crore) | Average Propensity to Consume (APC) | Marginal Propensity to Save (MPS) |
| $\displaystyle 0$ | (-) $\displaystyle 30$ | - | - |
| $\displaystyle 100$ | $\displaystyle 0$ | $\displaystyle 1$ | $\displaystyle 0.3$ |
| $\displaystyle 200$ | $\displaystyle 30$ | $\displaystyle 0.85$ | $\displaystyle 0.3$ |
| $\displaystyle 300$ | $\displaystyle 60$ | $\displaystyle 0.8$ | $\displaystyle 0.3$ |
Consumption function, C = $\displaystyle \bar{c}$ + bY
C = $\displaystyle 30$ + 0.7Y
Alternatively, Consumption at ₹ $\displaystyle 200$ crore level of income = ₹ 170.
Working Note:
At an income level of ₹ $\displaystyle 200$ crore, Marginal Propensity to Save (MPS) = $\displaystyle 0.3$ and Marginal Propensity to Consume (MPC) = $\displaystyle 1$ - MPS ⇒ $\displaystyle 1$ - $\displaystyle 0.3$ = $\displaystyle 0.7$
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.
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