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.

Answer 1

(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.