Question

In an economy, S = −100 + 0.6 Y is the saving function, where S is Saving and Y is National Income. If investment expenditure is 1,100, calculate:

(1) Equilibrium level of National Income

(2) Consumption expenditure at equilibrium level of National Income.

Answer 1

We are given, S = -100 + 0.6Y
and, I = 1100

(1) Equilibrium level of National Income
At equilibrium level, AD = AS
or, S = I
Substituting the values of S and I in the formula
-100 + 0.6Y = 1100
or, 0.6Y =100 + 1100
or, 0.6Y =1,200
or, Y =`1200/0.6` =2000
Thus, Equilibrium level of National Income is equal to 2000

(2) Consumption expenditure at equilibrium level of National Income.
We know, at equilibrium level Y =C + S
where, S = -100 + 0.6Y
Substituting the values of National Income at Equilibrium level in the formula
or, 2000 =C +(-100+0.6(2000))
or, C = 2000 - (-10+1200) = 900
Thus, Consumption expenditure at equilibrium level of National Income is equal to 900.