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CA Foundation · Business Economics · Determination of National Income

In a closed economy with no government, the consumption function is C = 200 + 0.75Y (in ₹ crore) and autonomous investment is ₹ 100 crore. What is the equilibrium level of national income and the saving at that level?

Equilibrium income is ₹ 1,200 crore and saving is ₹ 100 crore. Autonomous spending of 300 is multiplied by 1/(1 - 0.75) = 4, giving 1,200. Consumption is 1,100, so saving equals investment of 100, confirming the saving-investment equilibrium condition.

  1. AIncome ₹ 1,200 crore; saving ₹ 100 croreCorrect
  2. BIncome ₹ 1,200 crore; saving ₹ 300 crore
  3. CIncome ₹ 400 crore; saving ₹ 100 crore
  4. DIncome ₹ 1,600 crore; saving ₹ 400 crore

Explanation

Equilibrium Y = (A)/(1 - MPC) = (200 + 100)/(1 - 0.75) = 300/0.25 = ₹ 1,200 crore. Consumption = 200 + 0.75 x 1,200 = 1,100, so saving = 1,200 - 1,100 = ₹ 100 crore, equal to investment. Option B wrongly takes saving as autonomous consumption plus investment, and option C divides by MPC instead of 1 - MPC.

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