Question

C = 50 + 0.5 Y is the consumption function where C is consumption expenditure and Y is National Income and investment expenditure is 2,000 in an economy. 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= 50 + 0.5 Y + I

=> Y - 0.5 Y = 50 + 2,000

=> 0.5 Y = 2,050

=> Y = 2,050/ 0.5 = 4,100

(ii) Consumption Function, C = 50+ 0.5 Y where Y in the income in the economy.

So at national income 4,100 , consumption expenditure is

C = 50+ 0.5 ( 4,100)

= 50 + 2,050

= 2,100