Question

In a two-sector economy, the income function is: Y = C+ I and consumption function is given as: C = 40 + 0.75 Y. If investments are 60 crores, calculate: (a) Equilibrium level of income; (b) Level of consumption at equilibrium; (c) Saving at equilibrium.

Answer 1

(a) Consumption Function is C = 40+ 0.75 Y where Y in the income in the economy.

At equilibrium level of income,

AS=AD

Y= C+I

=> Y= 40 + 0.75 Y + 60

=> Y - 0.75 Y = 40 + 60

=> 0.25 Y = 100

=> Y = 100/ 0.25 = Rs. 400 crores

(b) Level of consumption at equilibrium income of 400 crores

C=40 + 0.75 ( 400)

= 40 + 300

= 340 crores

(c) Saving at equilibrium level of income,

Savings= Investment

= 60 crores