Question

In an economy, C = 500 + 0.9Y, and I = 1,000. Calculate the following:

1. Equilibrium level of income
2. Consumption expenditure at an equilibrium level of income.

Answer 1

C = 500 + 0.9Y, and I = 1,000

Y = C + I

Substitute the values:

Y = (500 + 0.9Y) + 1,000

Y = 1,500 + 0.9Y

Y − 0.9Y = 1,500

0.1Y = 1,500

Y = 15,000

Equilibrium level of income: ₹ 15,000

C = 500 + 0.9Y

= 500 + 0.9 × 15,000

= 500 + 13,500

= ₹ 14,000

Consumption expenditure at equilibrium: ₹ 14,000