Question

In an economy C= 200 + 0.75 Y is the consumption function where C is consumption expenditure and Y is national income. Investment expenditure is 4,000. Calculate equilibrium level of income and consumption expenditure.

Answer 1

(i) At equilibrium,

AS=AD

Y= C+I

=> Y= 200 + 0.75 Y + I

=> Y - 0.75 Y = 200 + 4,000

=> 0.25 Y = 4,200

=> Y = 4,200/ 0.25 = 16,800

(ii) Consumption Function, C = 200+ 0.75 Y where Y in the income in the economy.

So at national income 16,800 , consumption expenditure is

C = 200+ 0.75 ( 16,800)

= 200 + 12,600

= 12,800