Question

In an economy, C = 300 + 0.8 Y and I = 500 (where C = Consumption, Y = Income, I = Investment) Calculate the following: (a) Equilibrium level of income; (b) Consumption expenditure at equilibrium level of income.

Answer 1

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 300+ 0.8 Y + 500

=> Y - 0.8 Y = 300+ 500

=> 0.2 Y = 800

=> Y = 800/ 0.2 = 4,000

At equilibrium level of Income, consumption expenditure is
300 + 0.8 ( 4,000)
300 + 3,200
3,500