Question

From the following data about an economy, calculate: (a) Equilibrium level of national income; and (b) Total consumption expenditure at equilibrium level of national income.
(i) C =200 + 0.5 Y is the consumption function where C is consumption expenditure and Y is national income.
(ii) Investment expenditure is 1,500.

Answer 1

(i) At equilibrium,

AS=AD

Y= C+I

=> Y= 200 + 0.5 Y + I

=> Y - 0.5 Y = 200 + 1,500

=> 0.5 Y = 1,700

=> Y = 1,700/ 0.5 = 3,400

(ii) Consumption Function, C = 200+ 0.5 Y where Y in the income in the economy.

So at national income 3,400 , consumption expenditure is

C = 200+ 0.5 ( 3,400)

= 200 + 1,700

= 1,900