Question

In a two-sector economy, the income and consumption functions are: Y = C + I and C = 50 + 0.80Y.
If the investments are Rs. 50 crores, calculate: (a) Equilibrium level of income; (b) Level of consumption at equilibrium; (c) Saving at equilibrium. ((a) Rs. 500 cross; (b) 5450 awes: (c) Rs. 100 crores).

Answer 1

(a) At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 50 + 0.8 Y + I

=> Y - 0.8 Y = 50 + 50

=> 0.2 Y = 100

=> Y = 100/ 0.2 = 500 crores

(b) Level of consumption at equilibrium income of 500 crores

C=50 + 0.8 ( 500)

= 50 + 400

= 450

(c) Saving at equilibrium level of income,

Savings= Investment

= 50 crores.