question_answer

Find equilibrium level of Savings (S) and Investments (I), when Income(Y) =Rs.4,4000 Marginal Propensity to Consume (MPC) =0.75 and Autonomous Consumption\[(\overline{C)}\]=Rs.100. Do you think that the concept of autonomous consumption is valid in real life?

Answer:

Fixed exchange rate system refers to the system under which the rate of exchange of a currency is fixed in terms of gold or in terms of another currency by the central authority of the country. The system of exchange rate in which exchange rate is officially declared and fixed by the government is called fixed exchange rate system. Advantages of fixed exchange rate system are as follows: [a]It contributes to the coordination of macro policies of countries in an interdependent world economy. [b] It ensures that major economic disturbances in the member countries do not occur.           (ii) Accommodating items refer to those transactions, which are undertaken to balance the state of BoP i.e.to cover deficit or surplus in autonomous items. These transactions are not undertaken for the motive of profit. These items are also known as 'above the line' transactions. These transactions only take place on capital account.                                                                                         The main accommodating items are as follows: [a] Financial assets sold by the Central Bank to finance the deficit in BoP account. [b] RBI purchases foreign currency from the surplus in BoP account. [c] Government borrows from IMF to recover from BoP deficit.