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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 Rs.100. Calculate: (i) Equilibrium level of National Income; (ii) Consumption expenditure at equilibrium level of national income.


Solution

(i) At equilibrium,

 AS=AD

Y= C+I 

=> Y= 100 + 0.4 Y + I 

=> Y - 0.4 Y = 100 + 100

=> 0.6 Y = 200

=> Y = 200/ 0.6 = Rs.334


(ii) Consumption Function, C = 100+ 0.4 Y where Y in the income in the economy. 
So at national income Rs. 334, consumption expenditure is 
 C = 100+ 0.4 ( 334) 
    = 100 + 133.6
    = Rs. 233.6. 

Economics

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