Page 3 - lesson note -Aggregate Demand and Related Concepts42

4. On the basis of consumption function: = 120 + 0.4 ; answer the

following questions.
a. Derive the savings function
b. Determine the savings at the income level of Rs.500crore.

c. At what level of income, savings is equal to zero.

Answer: -

a. If consumption function is = + . then,
0
=> = − + (1 − )
0
=> = −120 + (1 − 0.4)

=> = −120 + 0.6

b. When income Y=Rs.500, then = −120 + 0.6 × 500

=> = −120 + 300

= 180

c. At the break-even point, = 0
=> −120 + 0.6 = 0
=> 0.6 = 120
120
=> = = 200
0.6
5. The savings curve makes an intercept of Rs.40cr on the negative Y-axis. If
consumer spends 60% of additional income, then determine,
a. Consumption function.

b. Savings function.
c. Break-even level of national income.

Answer: -

a. At 0 level of national income there is dis-saving of Rs.40crore.
Therefore, autonomous consumption is = 40
0
∆ = 60% ∆
∆C 60
=> =
∆ 100
=> = 0.6

Therefore, the consumption function is given as = + .
0
=> = 40 + 0.6

b. Savings function = − + (1 − )
0