Question

Given, the consumption function, C = 150 + 0.6Y, where C = consumption expenditure, Y = income and investment expenditure = Rs 2,000. Calculate:

(i) Equilibrium level of national income

(ii) Consumption at equilibrium level of national income

(iii) Saving at equilibrium level of national income

• A. (i) Rs 5,375 (ii) Rs 3,375 (iii) Rs 2,300
• B. (i) Rs 5,375 (ii) Rs 3,375 (iii) Rs 2,000
• C. (i) Rs 3,375 (ii) Rs 4,375 (iii) Rs 2,000
• D. (i) Rs 8,750 (ii) Rs 3,375 (iii) Rs 2,000

Answer 1

The correct option is B

(i) Rs 5,375

(ii) Rs 3,375

(iii) Rs 2,000

(i) Given, C = 150 + 0.6Y and I = 2,000

At the equilibrium level,

Y = C + I

$\Rightarrow$ Y = 150 + 0.6Y + 2,000 $\Rightarrow$ Y = 2,150 + 0.6Y

Y - 0.6Y = 2,150 $\Rightarrow$ 0.4Y = 2,150

$Y=\frac{2,150}{0.4}=5,375$

(ii) Consumption, C = 150 +0.6(5,375)

= 150 + 3,225 = 3,375

(iii) We know that, Y = C + S

$\Rightarrow$ S = Y - C = 5,375 - 3,375 = 2,000

Alternatively,

Given : C = 150 + 0.6Y,

S = -150 + 0.4Y ($\because$ MPC = 0.6, accordingly MPS = 1 - 0.6 = 0.4)

Or, S = -150 + 0.4(5,375)

= -150 + 2,150 = 2,000.

(i) Equilibrium level of national income = Rs 5,375.

(ii) Consumption expenditure at equilibrium level of national income = Rs 3,375.

(iii) Saving at equilibrium level of national income = Rs 2,000.