Question

In an economy; C = 200 + 0.75 Y (where C is consumption expenditure and Y is National Income). Investment expenditure is ₹ 4,000 Crore. Calculate the following:

1. Equilibrium level of income.
2. Total consumption expenditure at equilibrium income level. 

Answer 1

i. Equilibrium Level of Income (Y): 

In equilibrium, Aggregate Demand (AD) = Aggregate Supply (AS) or  Y. 

I = ₹ 4000 crore 

AD = C +  I (where I is an investment)

Y = 200 + 0.75Y + ₹ 4,000 

Y − 0.75Y = ₹ 4,200 

0.25Y = ₹ 4,200

Y = `(₹ 4,200)/0.25`

Y = ₹ 16,800 Crore

ii. Total consumption expenditure at equilibrium income level:

C = 200 + 0.75Y

C = 200 + 0.75 (₹ 16,800) 

C = 200 + ₹ 12,600 

C = ₹ 12,800 Crore