capital stock

Here, in first condition, Y=Rs. 80 crore
C=Rs. 64 crore
Hence, S=Y-C=80-64=Rs. 16 crore
Now, Average Propensity to Save,
\(APS=\frac { S }{ Y } \) = \(\frac { 16 }{ 80 } \)=0.20
Again, when income and consumption expenditure rise,
Y=Rs.100 crore, C=Rs.78 crore, 
So, Average Propensity to Consume,
\(APC=\frac { C }{ Y } \)= \(\frac { 78 }{ 100 } \)=0.78
Here, \(\Delta Y\)=100-80=Rs.20 crore
and \(\Delta C\)=78-64=Rs.14 crore
So, Marginal Propensity to Consume,

\(MPC=\frac { \Delta C }{ \Delta Y } \)=\(\frac { 14 }{ 20 } \)=0.70

C=Y-S, APC=C/Y, \(MPC=\frac { \Delta C }{ \Delta Y } \)

The excess of Aggregate Demand above the level required to maintain equilibrium in full employment situation in an economy is termed as inflationary gap. It causes inflation and increases price levels in an economy. When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap. It causes reduction in prices in the economy. Inflationary and deflationary gap can be corrected by opting following means:
 (i) To correct the inflationary gap, government should form fiscal and monetary policy to close the gap. Monetary policy can be used in such a manner that it will contract the money supply in the economy by raising interest rates and opts the method of progressing taxation.
 (ii) To correct the deflationary gap, government should stood doing the additional expenditure equal to deflationary gap, so that deflationary gap is wiped out.

   \(\triangle \)Y = Rs.1,000 crores,  \(\triangle \)I = 20%
      \(\therefore\)                                 \(\triangle \)Y = \(\frac { 1000 }{5000 } \) \(\times\)100 = 20%
                                               k = \(\frac { \triangle Y }{ \triangle I } \) = \(\frac { 20 }{20 } \) = 1

Consumption function shows the relationship between consumption and income.
C = f (Y)
This equation states that there is a direct relation between consumption and the level of income. As the level of income increases, consumption also increases but the increase in consumption is less than the increase in income. The concept of consumption function can be further explained by following consumption schedule and curve:

The above table and diagram show that as the income increases, consumption
also increases but the increase in consumption is less than increase in income.

The equilibrium level of income is determined at a point where saving and investment are equal, i.e., S = 1.The given table and diagram illustrate the idea:

The given table and diagram show that the equilibrium level of income is ~ 300 crores and at this point S (l00) = I (l00).
The equilibrium level of income may not necessarily be at the full employment level, i.e., it is not necessary that there will always be full employment at the equilibrium level of income.