Question

Suppose in a hypothetical economy, people save 20% of their additional income. Ex-ante investments equal ₹ 100 and the equilibrium level of income stands at ₹ 700. Calculate dissavings at zero level of income.

Answer 1

Given, Marginal Propensity to Save (MPS) = 20% = 0.2

Ex-Ante Investments (I) = ₹ 100

Equilibrium level of Income (Y) = ₹ 700

As we know, at Equilibrium level of income, S = I

`- bar"C"` + (MPS) Y = 1

`- bar"C"` + (0.2) 700 = 100

`- bar"C"` = −40

Thus, dissavings at zero level of income = ₹ 40