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If the autonomous consumption is given as 100 and the tendency of the people to increase consumption for an increase in income is only 20%, then derive the savings function.

Solution

Correct Option: 1

MPC = 0.2, so MPS = 1 minus 0.2 = 0.8. Consumption function is C=100+0.2YC = 100 + 0.2Y. Saving function is S=YC=Y1000.2Y=100+0.8YS = Y - C = Y - 100 - 0.2Y = -100 + 0.8Y.

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