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C = C bar + (1 - MPS)Y

= 500 + (1 - 0.5)20,000

C = 500 + 10,000 = 10,500

Y = C + I

and we know C = C bar + b(Y)

∴ Y = C bar + b(y) + I

or C = 1,000 + 0.8(5,000)

or C = 1,000 + 4,000

or C = Rs. 5,000

As per the S-I approach, equilibrium if achieved where Ex-Ante Savings are equal to Ex-Ante Investments. Saving and investments indicate leakages and injections are equal to each other.

Since the sum of MPC and MPS is unity. Any increase in Marginal Propensity to save (MPS) would directly lead to decrease in Marginal Propensity to Consume (MPS). This means that it may lead to lesser proportion of the additional income going for consumption which is a vital factor of Aggregate Demand Expenditure. This may further lead to fall in equilibrium level of income in the economy.

C = 100 + 0.75Y

I = 150

(i) At equilibrium level of income:

Y = C + I

Y = 100 + 0.75Y + 150

Y = 0.75Y = 250

Y = 250/0.25m= 1,000 (in Rs.crores)

(ii) C = 100 + 0.75Y = 100 + 0.75(1000) = 100 + 750

= 850 (in Rs, crores)

Y = C + S or S = Y - C = 1,000 - 850 = 150(in RS. crores)

Y = C bar + MPC(Y) + I

1600 = C bar +  0.8(1600) + 300

C bar = 1600 - 1280 - 300 = 20

Y = C + (1 - MPS)Y + I

Y = 500 + (1 - 0.2)Y + 1,000

0.2Y = 1,500, Y = 7,500

Consumption function - The relationship between the consumption expenditure and the income is known as consumption function.

C = f(Y)

where C = consumption expenditure

f = function

Y = income 

Algebraic Expression of Consumption Function -The algebraic expression of Consumption Function is given by:

C = C bar + b(Y)

Here, C = consumption expenditure

C bar = minimum level of consumption at zero income 

It is of two types :

(i) Average Propensity to Consume (APC)- The ratio between the consumption expenditure and income is called Average Propensity to Consume.

APC = C/Y

(ii) Marginal Propensity to Consume (MPC) -

The ratio between the change in consumption expenditure with change in income  is called Marginal Propensity to Consume.

MPC = ΔC/ΔY

Saving Function - The relationship between

saving and income is known as Saving Function.

S = f(Y)

Saving is the residual of income after consumption.

S = Y - C

Algebraic Expression of Saving Function- It is given by

S = (-) S bar + b(Y)

(i) It is of two types:

(i) Average Propensity to Save (APS) -The ratio between total saving and the total income in an economy at a given level of income is termed as Average Propensity to save (APS).

APS = S/Y

 Marginal Propensity to Save (MPS)- The ratio between the change in saving with the- change in income is known as Marginal Propensity to save.

MPS = ΔS/ΔY.

Marginal Propensity to Consume is the ratio of change in consumption expenditure (△C) to change in total income (△Y).

Suppose △C = 70 and △Y = 100

Then, MPC = 70/100= 0.7

Average Propensity to Consume is the ratio of total consumption expenditure (C) to total income (Y).

Suppose C = 80 and Y = 100

APC = 80/100 = 0.8

(i) The sum of MPC and MPS is equal to 1

(ii) The higher the MPS, the lower is the value of multiplier.

Aggregate Supply refers to the value of final Ans. goods and services planned to produced in an economy during a given year.

Aggregate Supply refers to the value of final Ans. goods and services planned to produced in an economy during a given year.

Aggregate Demand refers to the total demand for goods and services in an economy, measured in terms of total expenditure.

It refers to the minimum level of consumption, even when income is zero. It is indicated by C in the consumption function:

C = bar C + b(y)

Marginal Propensity to Consume (MPC) is the ratio of change in consumption expenditure to "Change in Income".

MPC = △C/ △Y = Change in Consumption/ Change in Income

The ratio of total consumption expenditure to total income is called APC.

APC = C/Y

Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year.

Components:

(i) Private final Consumption expenditure

(ii) Government final consumption expenditure

(iii) Investment expenditure

(iv) Net exports.

Detailed Answer:

Aggregate Demand implies the total demand of final goods and services by all the people in an economy. It expresses the total demand in terms of money. In this manner, it can be defined as the actual aggregate expenditure incurred by all the people in an economy on different goods and services.

The components of aggregate demand are enlisted below:

(i) Private Consumption Expenditure (C): Private consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. Consumption depends on the level of the disposable income. There are two types of consumption expenditure: Autonomous Consumption Expenditure and Induced Consumption Expenditure.

(ii) Private Investment Expenditure (I): Private investment expenditure refers to the planned (ex-ante) total expenditure incurred by all the private investors on creation of capital goods such as, expenditure incurred on new machinery, tools, buildings, raw materials, etc. Broadly, investment can be categorised in two types: Autonomous Investment Expenditure and Induced Investment Expenditure.

(iii) Government Expenditure (G): Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment Purposes to enhance the welfare of the society and to achieve higher economic growth rates.

(iv) Net Exports (X - M): Net exports refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of a country. In other words, it is the difference between the exports and imports. 

Involuntary Unemployment occurs when those who are able and willing to work at the going wage rate do not get work.

Marginal Propensity to Consume-Change in Consumption due to change in income is known as Marginal Propensity to Consume.

Marginal Propensity to Consume plus Marginal Propensity to Save is always equal to 1.

MPC + MPS = 1

Full Employment is a situation in which all those who are able and willing to work at the prevailing wage rate find work.

Propensity to Consume is the ratio of change in consumption over change in income. In short, MPC = △C/ △Y

Propensity to Save is the ratio of change in saving over change in income. In short, MPS = △C/ △Y

Aggregate Demand: It refers to total value of final goods and services which all the sectors of an economy are planning to buy at a given level of income during a period of an accounting year.

Aggregate Supply: It refers to money value of goods and services that all the producers are willing to supply in an economy in a given time period.

Minimum value of Investment Multiplier is one.

Yes, all given values are correct.

S = - 50 + 0.2Y

S = - 50 + 0.2(2,000)

= 50 + 400

= Rs. 350 crore

At equilibrium level of income:

Y = C + S

2,000 = C + 350

C = 2,000 - 350

= 1,650(in Rs. crore)

MPC + MPS = 1

MPC + 0.2 = 1

MPC = 1 - 0.2 = 0.8

Investment Multiplier refers to increase in national income as i multiple of a given increase in Investment. Its value is determined by MPC. The value equals:

Multiplier = 1/1-MPC or 1/MPS

Suppose increase in investment is Rs.1000 and MPC = 0.8. The increase in National Income is in the following sequence.

(i) Increase in investment raises income of those who supply investment goods by Rs.1000. This is the first round increase.

 (ii) Since MPC = 0.8, the income earners spend Rs.800 on consumption. This raises the income of the suppliers of consumption goods by Rs.800, This is second round increase.

(iii) In the similar way, the third round increase in Rs.640 = 800 x 0.8. In this way national income goes on increasing round after round.

(iv) The total increase in income is Rs.5,000 which equals.

△Y = △I x 1/1-MPC

△Y = 1000 x 1/1-0.8 = Rs.5000

Planned spending refers to people planning to purchase final goods and services during the year. Planned output means the production units planning to produce final goods and services during the year.

When planned spending is higher than planned output, the producers find the stocks falling below the desired level. They start raising production. This raises income levels till inventories (stocks) reach the desired level and economy is in equilibrium.

The correct answer is (b) 1/MPS

The correct answer is (d) Infinity.

(i) True,because I<S means AD<AS which will lead to accumulation of inventions.

(ii) False,because inflationary gap exists when AD > AS at full employment.

(iii) True, APS can be negative because AD can exceed AS upto a level of income.

C = 500 + (0.9)Y

Investment Expenditure = 3,000

Y = C + I

Y = 500 + 0.9Y + 3,000

=> 0.1Y = 3,500

∴ Y = 35,000

Y = C bar + MPC(Y) + I

Y = 120 + 0.9(Y) + 1,100

0.1Y = 120 + 1,100 = 1,220

Y = Rs. 12,200.

Y = C + I

we know, C = C bar + b(Y)

or Y = C bar + b(Y) + I

700 = 70 + 0.8(700) + I

or 700 = 70 + 560 + I

or I = 700 - 630

or I = 70

Y = C + I

C = C bar + b(Y)

∴ Y = C bar + b(Y) + I

∴ 1,000 = 200 + (1 - 0.25)1,000 + I

or 1,000 = 200 + 0.75 x 1,000 + I

or 1,000 = 200 + 750 + I

or 1,000 = 950 + I

or I = 1,000 - 950

I = Rs. 50