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Question
Calculate investment expenditure from the following data about an economy which is in equilibrium:
National income = 1000
Marginal propensity to save = 0.25
Autonomous consumption expenditure = 200
Solution
As we know that
Y=C+I
or
`Y=bar C+cYd+I` (i)
`C=bar C+cY`
Given that
`bar C`is autonomous consumption expenditure = 200
c is marginal propensity to consume 1 mps
When mps = 0.25
c=1-0.25=0.75
Income (y) = 1000
Apply all the values in equation (i)
1000=200+0.75x1000+I
I+1000-200+750=50
Thus, investment expenditure is 50.
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