Question

From the data given below about an economy, calculate (a) investment expenditure and (b) consumption expenditure.

(i)	Equilibrium level of income	5,000
(ii)	Autonomous consumption	500
(iii)	Marginal propensity to consume	0.4

Answer 1

(a) Investment expenditure
We can denote consumption function as
C = C + (c)Y
Where, C ia autonomous consumption which is given as 500,
Y is equilibrium level of income which is given as 5000,
and,c is marginal propensity to consume which is given as 0.4
Substituting the values in the formula
C = 500 + (0.4) 5,000
C = 2,500
We know, at equilibrium level, Y = C + I
Thus, I = Y- C
or, I= 5000 - 2500 = 2500

(b) Consumption expenditure
As we know,
C = C + (c)Y
C = 500 + (0.4) 5000 = 2500