Question

Calculate equilibrium national income from the following:
(i) Consumption expenditure at zero income Rs.60
(ii) Marginal propensity to consume 0.9
(iii) Investment Rs. 100
(Equilibrium level of income =Rs. 1,600)

Answer 1

The Consumption Function, C = 60+ 0.9 Y where Y in the income in the economy.

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 60 + 0.9 Y + 100

=> Y - 0.9 Y = 60 + 100

=> 0.1 Y = 160

=> Y = 160/ 0.1 = Rs. 1,600.