(a) Distinguish between Autonomous Investment and Induced Investment.
(a) Distinguish between Autonomous Investment and Induced Investment.
(b) On the basis of the following information about an economy, calculate its equilibrium level of income.
(i) Autonomous Consumption = 100
(ii) Marginal Propensity to Consume = 0.75
(iii) Investment = 5,000
1 Answers
(a) Autonomous Investment: It is the expenditure on capital formation, which is independent of the change in income, rate of interest and rate of profit.
Induced Investment : It is the investment which is undertaken as a result of a change in the level of income or consumption. It depends upon profit expectations.
(b) Y = C + I
and C = C bar + b(Y)
here Y = C bar + b(Y) + I
since S = I = 5,000
or Y = 100 + 0.75(Y) + 5,000
or Y - 0.75Y = 5,000
or 0.25Y = 5,100
or Y = 5,100/0.25 = 5,100/25 x 100
Y = Rs. 20,400