Saving And Investment Equality
Illustration 44
Presume that the level of selfgoverning investment in an economy is 400 millions. The saving function is given to be S =  160 + 0.25 Y. Find the equilibrium level of earnings.
Solution
According to saving – investment approach, the level of earnings is in equilibrium at which S = I.
Given,
S = 160
+ 0.25 Y and
I = $ 400 millions
Substituting the values of S and I in the equilibrium equation we get,
160 + 0.25Y = 400
0.25Y = 400 + 160
Y = 560 / 0.25
Therefore the equilibrium level of earnings is equal to 2,240 million dollars.
Illustration 45
In an economy the following are the data given:
 When the level of the national income is $1000 millions, savings are of $100 millions and
 When the national income is $1100 millions, savings are of $140 millions and
 If planned investment is $140 millions, what is the equilibrium level of the national income?
Solution
 In an economy, equilibrium exists when planned saving equals planned investment.
 As planned investment is $140 millions, equilibrium will take place at an earnings level of $1100 millions for the reason that at that income level alone planned investment equals planned savings of $ 140 millions.
 Therefore, the equilibrium level of the national income is $ 1100 millions.
Illustration 46
What will be the hike in national income with an initial hike in investment; and is expressed in the form as below:
Increase in Income
ΔY = 200 + 200 * 8 /10 + 200 * (8 / 10) ^ 2 + 200 * (8 / 10) ^ 3 +200 * (8 / 10) ^ 4 ……. + 200 * (8 / 10) ^ n.
Solution
Since the above series is one of geometric progression, increase in income ΔY
= 200
* 1
1 – 8
/ 10
= 200
* 1
(10 – 8)
/ 10
= 200
* 1
2
/ 10
= 200 * 5
Therefore ΔY = $1,000 millions
 Therefore, it is thus clear from above that if the marginal propensity to consume is 8 / 10,
 The investment of $ 200 millions tends to a hike in national income by $1000 millions.
 Hence the Investment Multiplier is equal to 5.
Illustration 47
Suppose the marginal propensity to consume of a community is equal to 4 / 5, what is the size of multiplier? Also ascertain if the marginal propensity to consume is 1 / 4.
Solution
Multiplier = 1
1 – MPC
= 1
1 – 4
5
= 1
(5 – 4)
/ 5
= 1 / 0.2 = 5
If the marginal propensity to consume is 1 / 4,
Multiplier = 1
1 – MPC
= 1
1 – 1
/ 4
= 1
1 – 0.25
= 1 / 0.75 = 1.33.
Hence the size of multipliers are 5 and 1.33 in the above two cases.
Illustration 48
Presume the level of self – governing investment in the economy is $ 600 millions and consumption function of the economy is
C = 120 + 0.75Y
 What will be the equilibrium level of income?
 What will be the increase in national income if the investment hikes by $ 40 millions?
Solution
For equilibrium level of income,
Y = C
+ I ……….Equation
(1)
C = 120 + 0.60Y
I = 600 millions
Substituting the values of C and I in Equation (1), we get
Y = 120 + 0.60 Y + 600
Y – 0.60Y = 120 + 600
0.4Y = 720
Y = 720 / 0.4
Y = 1800
The equilibrium level of income is therefore equal to $1800 millions
The hike in income takes place as a result of hike in investment by 40 millions based on the size of multiplier. The size of multiplier is ascertained by the value of marginal propensity to consume.
In the given consumption function, C = 120 + 0.60 Y and the marginal propensity to consume is equal to 3 / 5.
Therefore,
Multiplier
K = 1
1 – MPC
= 1
1 – 3
/5
= 1
(5 – 3)
/ 5
= 1
2
/ 5
= 1 / 0.4 = 2.5
ΔY = ΔI
x k
= 40
* 2.5
= 100 million dollars
Therefore, the increase in investment by 40 million dollars, national income will rise by $100 millions.
Illustration 49
How much will be the hike in the investment is required to lift the earnings by $5000, if MPC is 0.65.
How much will there be hike in consumption and saving due to this hike in income?
Solution
Multiplier
K = ΔY
ΔI
ΔI = ΔY …….Equation
(1)
ΔK
Multiplier
K = 1
1 – MPC
MPC = 0.60
K = 1 = 2.5
1 – 0.60
Given ΔY = 5,000
Substituting the values of ΔY and K in the equation (1), we get
ΔI = 5,000 = 2,000
2.5
Thus investment should rise by $2000 to accomplish $ 5000 increment in income.
Now, ΔC = ΔY x MPC
= 5,000 * 0.60
= $3,000
ΔS = ΔY – ΔC
= 5,000 – 3,000 = $2,000
The Functional Equality
The equality amidst saving and investment in the functional or programme sense is brought about by adjusting mechanism of earnings of variations in the cost of interest. In this sense, saving and investment are equal only at equilibrium level of earnings. Revenue is functionally associated to saving and investment. When saving is more than investment, earnings drops and when investment is more than saving, income rises. This dynamic course of variations in earnings, savings and investment will carry on till saving and investment are unequal although are also in equilibrium.
Income  million $ 
Saving  million $ 
Investment  million $ 
Income Shifts 
400 
0 
40 

600 
30 
60 

800 
60 
90 

1000 
90 
100 

1200 
120 
120 
Symmetry 
1400 
150 
140 

1600 
180 
160 

1800 
210 
180 
The above table represents that so long as investment is greater than saving earnings prolongs to hike up till it arrives at the earnings level of $ 1200 millions where saving and investment are also in equilibrium at $ 120 millions each. But after this point, saving exceeds investment contracts and again reaches equilibrium level of $ 1200 millions.
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 Accelerator theory of Investment
 Average Propensities, Marginal Propensity to Save
 Camouflaged Redundancy
 Classical Vs. Keynesian Models of income and Employment
 Concept of multiplier
 Consumption Function
 Complex Multiplier
 Criticisms of Keynesian Thesis
 Drift Theory of Consumption
 Foreign Trade Multiplier
 Government Expenditure
 Investment Function
 Jorgenson's Neoclassical Notion of Investment
 Keynesian Postulations and Underdeveloped Countries
 Keynesian Theory of Income, Output and Employment
 Model of National Income Determination
 Principle of Acceleration and the Super Multiplier
 Principle of Acceleration and the Super Multiplier  Part I
 Thrift, Marginal Competence of Capital
 Saving Function
 Saving  Investment Parity
 Some New Theories of Investment
 Theory of Consumption Function
 Unemployment and Full Employment