Question

Calculate the equilibrium level of income in the economy, if C = 500 + (0.9) Y; and Investment Expenditure = 3,000.
(Equilibrium Level of Income = 35.000)

Answer 1

Consumption Function is C = 500+ 0.9 Y where Y in the income in the economy.

At equilibrium level of income,

AS=AD

Y= C+I

=> Y= 500 + 0.9 Y + 3,000

=> Y - 0.9 Y = 500 + 3,000

=> 0.1 Y = 3,500

=> Y = 3,500/ 0.1 = 35,000.