Question

An economy is in equilibrium. From the following data about an economy calculate autonomous consumption.

1) Income = 500

2) Marginal propensity to save = 0.2

3) Investment expenditure = 800

Answer 1

Given that

Income (Y) = 5000

Marginal propensity to save (s) = 0.2

Therefore, marginal propensity to consume = 1 -0.2 =0.8

I= 800

As we know that

Y = C + I

C = Y -1 

C = 5000 – 800 = 420

`C = bar(C) + cY`

`4200 = bar(C) + 0.8(5000)`

`bar(C) = 200`

Thus, autonomous consumption is 200.