Using the equation of consumption function calculate consumption expenditure at the income level of Rupees 2,000crores, if autonomous consumption is rupees 160 and 20% of additional income is saved. Also calculate the value of multiplier.

Dear student,

Calculation of consumption expenditure

Consumption function,  C=C¯ + b (Y)where,C¯ = autonomous consumption= Rs 160 croreY= Income= Rs 2000 croresb=MPC=marginal propensity to consumeMPS= Marginal propensity to save = 20%= 0.2we know that, MPS + MPC=10.2+ b=1b=0.8putting values to equation, C= C¯  +b(Y)C=160 + 0.8 (2000)= Rs 1760 crore

Calculation of Value of multiplier

multiplier = k =   1MPSk=10.2=5


Regards!!

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