Question

C = 100 + 0.4 Y is the Consumption Function of an economy where C is Consumption Expenditure and Y is National Income. Investment expenditure is 1.100. Calculate

(i) Equilibrium level of National Income.

(ii) Consumption expenditure at equilibrium level of national income.

Answer 1

Given that

C = 100 + 0.4Y

I = 1100

(i) Equlibrium level of National Income

At equilibrium level, AD = AS or Y = C + I

By substituting the values of C and I in the formula, we get

Y = 100 + 0.4Y + 1100

Y - 0.4Y = 100 + 1100

0.6Y = 1200

Y = `1200/0.6` = 2000

(ii) Consumption expenditure at equlibrium level of National Income

C = 100 + 0.4Y

By substituing the value of national income at equlibrium level in the formula, we get

C = 100 + 0.4(2000)

C = 100 + 800 = 900