Income Determination Test - 23

At zero level of income, there is some amount of consumption which means autonomous consumption. Since \(Y-C=S\), so at zero level of income savings will be negative.

Given, APC=0.7

APS=1-APC= 1-0.7= 0.3

The slope of the saving function gives the increase in savings per unit increse in the income. This is known as Marginal Propensity to Save. Since ' \(b\) ', that is Marginal Propensity to Consume is less than one, it follows that (1-b) i.e. MPS is positive. Saving is an increasing function of income.

APC stands for Average Propensity to Consume. It is the ratio of consumption expenditure to the disposable income of the economy. It is a measure of the proportion of income that is spent on consumption.

The formula for calculating APC is:

\(APC = C / Y\)

Where \(C\) is the total consumption expenditure and \(Y\) is the disposable income.

The coefficient (1-b) measures the slope of the saving function. It tells us how much saving changes for a given change in income.

MPC is represented by \(b\). When \(b\) is smaller than \(1,1-b\) must be positive, or \(1-b>0\).

MPS=1-MPC

MPS= 1-0.75. (given)

=0.25

Planned savings and planned investment are the major determinants of equilibrium income. When they are equal, the economy is at equilibrium. If there is a surplus of savings, then output and income decrease, and if there is a shortage of savings, then output and income increase.

 Here, -a implies dissavings when level of income is zero.

In the Keynesian view, equilibrium income is determined primarily by aggregate demand. This is because Keynes argued that fluctuations in economic activity were driven by changes in total spending rather than changes in the supply of goods and services. Thus, equilibrium income occurs when aggregate demand equals aggregate supply, but aggregate demand is considered the key determinant of overall economic activity according to Keynesian theory.