7. Aggregate Demand and Related Concepts

aggregate demand and related concepts numericals with solutions

aggregate demand and aggregate supply class 12 important questions

MEANING AND COMPONENTS OF AFFREFATE DEMAND

Aggregate Demand (AD) refers to the total value of final goods and services that all the sectors of an economy plan to buy at a given level of income during a period of one accounting year.

            It is important to note that aggregate expenditure refers to the planned expenditure and not the actual expenditure. So, AD is the total expenditure that all household, firms, government and the rest of the world are planning to incur during a given period of time.

Do not confuse Aggregate Demand with Market Demand: Aggregate demand is the total demand for all goods and services in the entire economy, whereas, market demand is the total demand for one commodity in the market.

Components of Aggregate Demand

The various components of Aggregate demand are:

1. Private (Household) Consumption Expenditure (C): It refers to the total expenditure incurred by households on purchase of goods and services during an accounting year. Generally, consumption expenditure is directly influenced by the level of ‘Disposable Income’, i.e., higher the disposable income, more is the consumption expenditure and vice-versa.
2. Investment Expenditure (I): It refers to the total expenditure incurred by all private firms on capital goods. It includes addition to the stock of physical capital assets such as machinery, equipment, buildings, etc. and change in inventory.
3. Government Expenditure (G): It refers to the total expenditure incurred by government on consumer goods and capital goods to satisfy the common needs of the economy. It means, government incurs consumption expenditure as well as investment expenditure.

• Consumption expenditure is incurred to meet public needs like law and order, education, health, transport, defense, etc.
• Investment expenditure involves construction of highways, roads, power plants, etc.

4. Net Export (X – M): Exports indicate for goods produced within the domestic territory of a country by the rest of the world. Imports refer to demands of the residents of a country for the goods that have been produced abroad. The difference between exports and imports is termed as net exports.

Aggregate Demand in a Two-Sector Model (AD = C + I)

Since the determination of income and employment is to be studied in the context of the two-sector model (households and firms), the third and fourth components of aggregate demand are not discussed in detail. So, even though AD has four components, we will assume that there is closed economy and AD is a function of only consumption expenditure and investment Expenditure, i.e. AD = C + I.

Diagrammatic Representation of AD

AD depends upon the level of income in the economy. Generally, there exists a positive relationship between income and the level of aggregate expenditure in the economy, i.e., as the level of income rises, AD also rises and vice-versa. Let us understand this with the help of revel following noteworthy points about AD:

Aggregate Demand Schedule Amount in ₹ crores

Important Price about AD

1. AD = C + I: AS stated before, AD is assumed to be a function of only consumption demand and investment demand.
2. Positive consumption, even when income level is zero: There is always some minimum level of consumption, even when the income is zero. It happens because people need certain basic goods and services to sustain themselves, even if income is zero.
3. Slop of consumption Curve: The first component of AD, i.e. consumption Curve, slopes. There is always some minimum level of consumption, even when the income is zero. It happens because people need certain basic goods and services to sustain themselves, even if income is zero.
4. Slop of consumption Curve: The first component of AD, i.e. consumption Curve, slopes. There is always some minimum level of consumption, even when the income is zero. It happens because people need certain basic goods and services to sustain themselves, even if income is zero.
5. Starting of Autonomous investment Curve: AD curve starts from point T, as at zero level of national income, AD = Autonomous Consumption (OS) + Autonomous Investment (OR).
6. Slope of AD curve: AD curve has a positive slope which indicates that as income increases, AD or aggregate expenditure also increases.

AGGREGATE SUPPLY – Aggregate Supply (AS) refers to the money value of final goods and services that all the producers are willing to supply in an economy in given time period. It must be noted that AS refers only to ‘Planned Production’ or ‘Desired Output’ during a given time period. It does not refer to actual output.

Aggregate Supply = National Income

When AS is expressed in physical terms, it refers to the total output of goods and services in an economy. We know that value of total output is distributed to factors of production in the form of rent, wages, interest and profit. The sum total of these factor incomes (i.e. rent + wages + interest + profit) at domestic and national level is termed as National Income. So, we can say that aggregate supply (AS) and national income (Y), are one and the same things.

Components of Aggregate Supply (AS) of National Income (Y)

The major portion of national income is spent on consumption of goods and services and the balance is saved. It means, Income (Y) is either consumed or saved.

So, National Income (Y) = Consumption (C) + Saving (S)

Or, Y = AS = C + S

Diagrammatic Representation of AS

The aggregate supply curve and national income curve coincide with each other. The nature of National Income curve or AS curve can be made clear with the help of

Income is represented on the X-axis and consumption and saving are measured on the Y-axis. A 45 line, which represents the aggregate supply, has been drawn from the origin. The line is drawn by taking the same scale on both the axes. At every point on this 45 line, Y = C + S.

CONSUMPTION FUNCTUION (PROPENSTIY TO CONSUME)

Consumption expenditure refers to that portion of income which is spent on the  purchase of goods and services at the given level of income. Consumption function refers to functional relationship between consumption and national income.

C = F (Y)

Where, C = Consumption; Y = National Income; f = Functional relationship

• Consumption function represents the willingness of households to purchase goods and services at a given level of income during a given time period.
• It also shows the consumption level at different levels of income in an economy.
• It is a psychological concept as it is influenced by subjective factors, like consumers’ preferences, habits, etc.

Important Observation

1. Starting Point of Consumption Curve – Consumption curve (CC) starts from point C on the Y-axis. This implies that there is autonomous consumption of OC even when the national income is zero.
2. Slope of Consumption Curve – CC has a positive slope, which indicates that as income increases, consumption also rises. However, proportionate rise in consumption is less than proportionate rise in income as part of income is saved.
3. Income is less than Consumption – When income is less than consumption (i.e., at income levels less than OM in and less than Rs.200 crores in the gap is covered by dissaving (i.e., by utilizing previous saving) ΔCOE represents dissaving.
4. Break-even point (C = Y) – At OM level of income (as represented by point E), consumption becomes equal to income and saving is zero. The point E is known as the ‘Break-even point’. In break-even point occurs corresponding to income of Rs.200 crores.
5. Income is more than Consumption – At points to the right of point E, income is more than consumption. Excess of income leads to saving. The gap between the 45ᵒ line is significant as it indicates whether consumption spending is equal to, greater than, or less than the level of income.

aggregate demand and aggregate supply class 12 sandeep garg

TYPES OF PROPENSITIES TO CONSUME

There are two technical aspects of Propensity to consume:

1. Average Propensity to Consume (APC) – Average propensity to consume refers to the ratio of consumption expenditure to the corresponding level of income.

APC = consumption (C) / Income (Y)

Important Points about APC

• APC is more than 1: As long as consumption is more than national income, i.e. before the break-even point, APC>1.
• APC = 1: At the Break-even point, consumption is equal to national income. So, APC = 1 at the income level of Rs.200 crores.
• APC is less than 1: Beyond the break-even point, consumption is less than national income. As a result, APC<1.
• APC falls with increase in income: APC falls continuously with increase in income because the proportion of income spent on consumption keeps on decreasing.
• APC can never be zero: APC can be zero only when consumption becomes zero. However, consumption in never zero at any level of income. Even at a zero level of national income, there is autonomous consumption.

Marginal Propensity to Consume (MPC)

Marginal propensity to consume refers to the ratio of change in consumption expenditure to change in total income. MPC explain what proportion of change in income is spent on consumption.

MPC = change in consumption (ΔC)/Change in Income (ΔY)

Important Points about MPC

1. Value of MPC varies between 0 and 1 – We know, incremental income is either spent on consumption or saved for future use.

• If the entire additional income is consumed, i.e. ΔS = 0, then MPC = 1.
• However, if entire additional income is saved, i.e. ΔC = 0, then MPC = 0

In normal situations, value of MPC varies between 0 and 1.

2. MPC of poor is more than that of rich – It happens because poor people spend a greater percentage of their increased income on consumption as most of their basic needs remain unsatisfied. On the other hand, rich people spend a smaller proportion as they already enjoy a high standard of living. Similarly, the MPC of developing countries like Nepal, Bangladesh, etc. is higher than the MPC of developed countries like America or England.

3. MPC falls with successive increase in income – It happens because as an economy becomes richer, it has the tendency to consume smaller percentage of each increment to its income and save more. Hence, at higher levels of income, people generally  have lower MPC.

SAVING FUNCTION (PROPENSITY TO SAVE)

Like consumption, saving is also a function of income, i.e., saving also depends upon the level of income. Saving is the excess of income over consumption expenditure. Saving function refers to the functional relationship between saving and national income.

S = f (Y)

Where, S = Saving; Y = National Income; f = Functional relationship

Important Observations from Saving Schedule and Saving Curve

1. Starting Point of Saving Curve – Saving curve (SS) starts from point S on the Y-axis. Indicating that there is negative saving (equal to amount of autonomous consumption) when national income is zero.
2. Slope of Saving Curve – SS has a positive slope, which indicates the positive relationship between saving and income.
3. Break-even point (S = 0) – Saving curve crosses the X-axis at point R, which is known as break-even point as at this point, saving is zero (or consumption is equal to income). According to break-even point occurs corresponding to income of Rs.200 crores.
4. Positive Saving – After the break-even point, saving is positive.

TYPES OF PROPENSITIES TO SAVE

Propensities to save are of two types:

1. Average Propensity to Save (APS)
2. Marginal Propensity to Save (MPS)
3. Average Propensity to Save (APS) – Average propensity to save refers to the ratio of saving to the corresponding level of income.

APS = Saving (S) / Income (Y)

Important Points about APS

1. APS can never be 1 or more than 1 – As saving can never be equal to or more than national income.
2. APS can be 0 – In APS = 0 as saving are zero at the income level of Rs.200 crores. This point is known as Break-even point.
3. APS can be negative or less than 1 – At income levels which are lower than the break-even, point, APC can be negative as there will be dissavings in the economy (shown by the shaded area )
4. APS rises with increase in income – APS rises with increase in income because the proportion of income saved keeps on increasing.

Marginal Propensity to Save (MPS) – Marginal propensity to save refers to the ratio of change in saving to change in total income.

MPS = Change in Saving (ΔS)/Change in Income (ΔY)

Relationship between APC and APS

The sum of APC and APS is equal to one. It can be proved as under:

We know: Y = C +S

Dividing both sides by Y, we get

Y/Y = C/Y + S/Y

1 = APC + APS                                                 [ Y/Y = 1; C/Y = APC; S/Y = APS]

Relationship between MPC and MPS

The sum of MPC and MPS is equal to one. It can be proved as under.

We know: ΔY = ΔC + ΔS

Dividing both sides by ΔY, we get:

ΔY/ΔY = ΔC/ΔY + ΔS/ΔY

1 = MPC + MPS                                            [ΔY/ΔY = 1; ΔC/ΔY = MPC; ΔS/ΔY = MPS]

Value of APC, MPC and MPS – The values of MPC and MPS varies between 0 and 1, whereas, APS can be even less than 1 and APC can be more than 1. Let us have a comparative view of values of all of them:

Equation of Consumption Function

The Consumption Function can be put into two parts:

• Even when income (Y) is zero, there is some minimum consumption, known as autonomous consumption (c), which is always positive.
• When income increases, consumption also increases. But, the rate of increase in consumption is less than rate of increases in income.

INVESTMENT FUNCTION

Investment refers to the expenditure incurred on creation of new capital assets. Investment involves addition to the physical capital and changes in the inventory. It includes the expenditure incurred on assets like machinery, building, equipment, raw material, etc. which lead to increase in the productive capacity of an economy. The investment expenditure is classified under two heads:

• Induced Investment
• Autonomous investment

1. Induced Investment – Induced investment refers to the investment which depends on the profit expectations and is directly influenced by income level. It is income elastic, i.e. it increases with increase in income and vice-versa.
2. Autonomous Investment – Autonomous investment refers to the investment which is not affected by changes in the level of income and is not induced solely by profit motive. It is income inelastic, i.e. it is not influenced by change in income.

EX-ANTE AND EX-POST SAVING AND INVESTMENT

‘Ex-ante’ variable is the planned or expected value of variable, whereas, ‘Ex-post’ variable is the actual or realized value of the variable. Both these terms are generally used in the context of saving and investment. There are two aspects of saving and investments:

• Ex-ante Saving and Ex-ante Investment
• Ex-post Saving and Ex-post Investment

1. Ex-ant Saving and Ex-ant Investment – Ex-ante saving refers to the amount of saving which households (or savers) plan to save at different levels of income in the economy. In other words, Ex-ante saving refers to the planned savings of an economy at different levels of income. The amount of ex-ante or planned saving is given by the saving function (or propensity to save).

Ex-ante investment refers to the amount of investment which firms plan to invest at different levels of income in the economy. The amount of ex-ante or planned investment is determined by the relation between investment demand and rate of interest, i.e. by investment demand function.

2. Ex-post Saving and Ex-post Investment – Ex-post saving refers to the actual or realised saving in an economy during a year. Ex-post or actual saving is the sum total of planned saving and unplanned saving. Ex-post investment refers to the realized or actual investment in an economy during a year. Ex-post or actual investment is the sum total of planned investment and unplanned investment.

It must be noted that ex-post saving and ex-post investment are equal at all levels of income. This equality between the two is brought by fluctuations in income.

FULL EMPLOYMENT AND INVOLUNTARY UNEMPLOYEMNT

Full Employment – Full employment refers to a situation in which all those people, who are willing and able to work at the existing wage rate, get work without any undue difficult.

Full employment, there can be two types of unemployment:

• Frictional Unemployment – It refers to temporary unemployment, which exists during the period wherein workers leave one job and join another. It arises due to laboure market imperfections such as lack of market information about availability of jobs and a lack of perfect mobility on the part of workers.
• Structural Unemployment – It refers to the unemployment, in which people remain unemployed due to a mismatch between unemployed persons and the demand for specific types of workers. It is associated with structural change in the economy. For example, due to computerization, workers who do not possess enough knowledge of computer will be unemployed until they do some computer course or training.

Involuntary Unemployment – Involuntary unemployment refers to an unemployment in which all those people, who are willing and able to work at the existing wage rate, do not get work.

UNSOLVED PRACTICALS

1. Calculate APC and APS from the following schedule:

Solution –

2. At income level of Rs.5,000 crores, total saving is Rs.1,000 crores. Calculate APC.

Solution –

Given :

Y = 5,000 crores

S = 1,000 crores

Now,

APS = S/Y

       = 1,000 / 5,000

       = 0.2

Also,

APC = 1 – APS

       = 1 – 0.2

       = 0.8

3. Calculate MPC and MPS from the following schedule:

Solution –

4. If household save Rs.500 crores out of and additional income of Rs.5,000 crores, then calculate  MPC.

Solution –

Given

\Y = Rs.5,000 crores

\S = Rs.500 crores

So,

MPS = ΔS/ΔY

        = 500/5000

        = 0.1

Now,

MPC = 1 – MPS

        = 1 – 0.1

       = 0.9

5. If the total income increases from Rs.5,000 crores to Rs.6,000 croes and saving increase from Rs.1,000 croes to Rs.1,500 crores, calculate MPC.

Solution –

Given –

Y = 5,000 crores

Y₁ = 6,000 crores

S = 1,000 crores

S₁ = ₹1500 crores

ΔS = S₁ – S

     = 1,500 – 1000

     = Rs.500 crores

ΔY = Y₁ – Y

     = 6,000 – 5,000

    = 1,000

So,

MPS = ΔS/ ΔY

        = 500 / 1000

       = 0.5

Now,

MPC = 1 – MPS

         = 1 – 0.5

        = 0.5

6. If MPC is o.3 and the income increase from Rs.6,000 crores to Rs.9,000 crores, what will be the additional consumption in the economy?

Solution –

Given –

MPS = 0.3

Y = 6,000 crores

Y₁ = 9,000 crores

So,

ΔY = Y₁ – Y

     = 9,000 – 6,000

     = 3,000 crores

We know,

MPS = ΔS/ ΔY

i.e.,

0.3 = ΔS/3,000

ΔS = Rs.900 crores

ΔY = ΔS – ΔC

3,000 = 900 + ΔC

ΔC = 3,000 – 900

ΔC = Rs.2,100 crores

Additional consumption = Rs.2,100 crores

7. From the following schedule, compute APC, APS, MPC and MPS:

Solution –

8. Complete the following table:

Solution –

9. Complete the following table:

Solution –

10. Complete the following table:

Solution –

11. Complete the following table:

Solution –

12. Complete the following table. Construct the consumption function at Rs.200 crore level of income.

Solution –

13. Complete the following table:

Solution –

14. If National income is Rs.50 crore and Saving Rs.5 crore, find out average propensity to consume. When income rises to Rs.60 crore and saving to Rs.9 crore, what will be the average propensity to consume and the marginal propensity to save?

Solution –

Given –

Y = 50 crore

S = 5 crore

Y₁ = 60 crore

S₁ = 9 crore

APC when Y = 50 crore and S = 5 crore

APC = C/Y                                      

       = 45/50

       = 0.9

When income = 60 crores and savings = 9 crore then

APC = C/Y

       = 51/60

       = 0.85

MPS = ΔS / ΔY

        = 4/10

        = 0.4

Working Note:

Y = C + S

C = Y – S

   = 50 – 5

   = 45 crore

C = Y – S

   = 60 – 9

   = 51 crore

ΔS =S₁ – S

     = 9 – 5

     = 4 crore

ΔY = Y₁ – Y

     = 60 – 50

     = 10 crore

• 15. Using the consumption function: C = c + b (Y), calculate saving at income of Rs.2,000 crore, if autonomous consumption is Rs.150 crores and 40% of additional income is consumed.

Solution –

Given –

C  = 150 crores

B = 0.4

Y = 2,000 crores

Now,

C = C + b (Y)

   = 150 + 0.4 (2,000) = 150 + 800

   = 950 crores

We know,

S = Y – C

   = 2,000 – 950

  = 1,050 crores

16. The saving function is given as: S = – 120 + 0.4 (Y). Determine. (i) Consumption function; (ii) Consumption at income level of Rs.600 crores, (iii) Break-even level of income.

Solution –

S = -120 + 0.4 (Y)

(i) Consumption function:

C = 120 + 0.6 (Y)

(ii) Given, Y = 600 crores

C = 120 + 0.6 (Y)

   = 120 + 0.6 x 600

   = 120 + 360

   = 480 crores

(iii) Y = C

Y = 120 + 0.6 (Y)

Y – 0.6 (Y) = 120

0.4 (Y) = 120

Y = 120 / 0.4

Y = 300 crores

17. The consumption function for an economy is given as: C = 200 + 0.8Y. (i) Determine the value of MPC can MPS; (ii) Autonomous Consumption; (iii) Derive the corresponding saving function; (iv) Calculate consumption at the income levels of Rs.3,000 crores and Rs.5,000 crores. (v) Determine the break-even level of income.

Solution –

Given :

C = 200 + 0.8 (Y)

(i) Value of MPC and MPS

We know,

C = C + by

So,

MPC i.e., b = 0.8

And MPS = 1 – MPC

                = 1 – 0.8

               = 0.2

(ii) Autonomous consumption i.e., C

= 200 crores

(iii) Saving function

S = – C + (1 –b) Y

= -200 + (1 – 0.8) Y

= -200 + 0.2 Y

(iv) Consumption at income of 3,000 crores and 5,000 crores

Consumption at income of 3,000 crores

C = 200 + 0.8 Y

   = 200 + 0.8 x 3,000

  = 200 + 2,400

  = 2,600 crores

Consumption at income of 5,000 crores

C = 200 + 0.8 Y

   = 200 + 0.8 x 5,000

  = 200 + 4,000

  = 4,200 crores

18. If MPC is four times MPS and consumption at zero level of income is Rs.70 crores, derive the consumption function.

Solution –

Given :

MPC = 4 MPS

i.e., b = 4(1 –b)

b = 4 – 4b

b + 4b = 4

5b = 4

B= 4/5 = 0.8

Consumption function

Given, autonomous consumption 70 crores

C = 70 crores

So, C = C + by

         = 70 + 0.8 Y

19. The consumption curve makes an intercept of Rs.60 crores on the Y-axis. If MPC:MPS can be expressed as 1 : 3, then derive the saving and consumption function. Also determine the level of income, when saving becomes zero?

Solution –

Given :

C = 60 crores

MPC : MPS = 1 : 3

MPC/MPS = 1/3

3 MPC = MPS

3B = 1 – b

4b = 1

b = 1/4

   = 0.25

Given :

So,

C = c + by

   = 60 + 0.25 (Y)

And,

S = – C + (1 – b) Y

  = – 60 + 0.75 Y

Level of income when saving becomes zero:

S = – C + (1 – b) Y

0 = – 60 + 0.75Y

0 + 60 / 0.75 = Y

Y = 80 crores

20. The break –even point for an economy occurs at the income level of Rs.500 crores If marginal propensity to consume is 0.6, determine: (i) autonomous consumption; (ii) Saving function; (iii) Level of income when saving is Rs.600 crores.

Solution –

Given ,

Y = C = 500 crores

MPC = 0.6

(i) Autonomous consumption

C = C + by

500 = C + 0.6 x 500

500 = C + 300

200 crores = C

(ii) S = – C + (1 – b) Y

= -200 + 0.4 (Y)

(iii) S = 600 crores

Y = ?

S = -200 + 0.4 (Y)

600 = -200 + 0.4 Y

800/0.4 = Y

2,000 crores = Y

21. The consumption function of an economy is given as: C = 40 + 0.7Y. Calculate the saving at the income level of Rs.2,200 crores.

Solution –

Y = 2,200 crores

C = 40 + 0.7 (Y)

   = 40 + 0.7 x 2,200

   = 40 + 1,540

   = 1,580 crores

S = Y – C

   = 2,200 – 1,580

   = 620 crores

22. The saving curve makes an intercept of Rs.40 crores on the negative Y – axis. If consumers spend 60% of additional income, then determine: (i) Saving Function; (ii) Consumption Function; (iii) Break-even level of income.

Solution –

Given :

-C = -40 crores

MPC = 0.6

(i) Saving function = -C + (1 – b) Y

                          = -40 + (1 – 0.6)Y

                          = -40 + 0.4Y

(ii) Consumption function = C + by

                                     = 40 + 0.6Y

(iii) At Break even level

Y = C

Y = 40 + 0.6Y

0.4Y = 40

Y = 40/0.4

Y = 100 crores

23. If national income is Rs.90 crore and Consumption expenditure Rs.81 crore, find out average propensity to save. When income rises to Rs.100 crore and consumption expenditure to Rs.88 crore. What will be the marginal propensity to consume and marginal propensity to save?

Solution –

Given:

Y = 90 crores

C = 81 crores

Y₁ = 100 crores

C₁ = 88 crores

Now,

APS = S/Y

       = 9/90

       = 0.1

MPC = ΔC/ΔY

         = 7/10

         = 0.7

MPS = 1 – MPC

        = 1 – 0.7

        = 0.3

24. The saving function is given as: S = – 120 + 0.5Y. Draw a diagram showing saving corresponding to income levels of 0,200, 400, 600 and 800.

Solution –

S = -120 + 0.5 Y

When

Y = 0

S = -120 + 0.5 x 0

   = -120

Y = 200

S = -120 + 0.5 x 200

   = -120 + 100

   = -20

Y = 400

S = -120 + 0.5 x 400

   = -120 + 200

   = -80

Y = 600

S = -120 + 0.5 x 600

  = -120 + 300

  = 180

Y = 800

S = -120 + 0.5 x 800

   = -120 + 400

   = 280

25. If consumption Function is given by: C = 30 + 0.4Y, then determine: (i) Savings at zero level of income; (ii) MPC; (iii) MPS; (iv) Break-even level of Income; (v) Saving Function.

Solution –

Given:

C = 30 + 0/4 Y

(i) Saving at zero level of income

C = 30 + 0.4 x 0

   = 30 + 0

   = 30

S = Y – C

   = 0 – 30

   = -30

(ii) MPC = 0/4

(iii) MPS = 1 – MPC

        = 1 – 0/4

        = 0.6

(iv) Break even level of income

Y = C

Y = 30 + 0.4Y

0.6Y = 30

Y = 30/0.6

Y = 50

(v) Saving function

S = – C + (1 – b)Y

   = -30 + 0.6Y

26. The consumption function of an economy is: C = 40 + 0.8 Y (amount in Rs.crores). Determine that level of income where average propensity to consumer will be one.

Solution –

Given:

C = 40 + 0.8Y

Now,

APC = C/Y

1 = C/Y

Y = C

Income level when Y = C:

Y = C

Y = 40 + 0.8

0.2Y = 40

Y = 40/0.2

Y = 200 crores

27. On the basis of following schedule, answer the given questions:

• Calculate Marginal Propensity to Save (MPS) at Rs.150 crores level of income.
• What is the value of Autonomous Consumption?

Solution –

28. You are given the consumption function of an imaginary economy, C = 100 + 0.8 Y, where C = Consumption and Y = Income.

Calculate:

• The value of Marginal Propensity to Save (MPS)
• The level of income at Break-Even Point

Solution –