Question

From the following information about an economy, calculate (i) its equilibrium level of national income, and (ii) saving at equilibrium level of national income. Consumption function: C = 200 + 0.9 Y (where C = consumption expenditure and Y = national income) Investment expenditure: I = 3,000.

Answer 1

(i)At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 200 + 0.9 Y + 3,000

=> Y - 0.9 Y = 200+ 3,000

=> 0.1 Y = 3,200

=> Y = 3,200/ 0.1 = 32,000 crores

(ii) At equilibrium level of Income, consumption expenditure is

Savings = Investment

= 3000 crores