Question

From the data given below about an economy, calculate: (a) investment expenditure; and (b) consumption expenditure.
(i) Equilibrium level of income 5,000
(ii) Autonomous consumption 500
(iii) Marginal propensity to consume. 0.4

Answer 1

(i) Consumption Function, C = 500+ 0.4 Y where Y in the income in the economy.

At equilibrium,

AS=AD

Y= C+I

=> 5,000 = 500 + 0.4 (5,000) + I

=> 5,000 = 500 + 2,000+ I

=> 5,000 = 2,500 + I

=> I = 5,000- 2,500 = 2,500.

(ii) Consumption Function, C = 500 + 0.4 Y where Y in the income in the economy.

So at national income 5,000 , consumption expenditure is

C = 500+ 0.4 ( 5,000)

= 500 + 2,000

= 2,500