Question

In an economy S = -50 + 0.5 Y is the saving function (where S = saving and Y = national income) and investment expenditure is Rs. 7,000. Calculate: (I) Equilibrium level of national Income. (II) Consumption expenditure at equilibrium level of national income.

Answer 1

S= -50+0.5 Y

C+S=Y

=> C = Y-S

= Y - (-50+0.5 Y)

= Y + 50 - 0.5 Y

= 50 + 0.5 Y

Hence, C = 50 + 0.5 Y

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 50+ 0.5 Y + I

=> Y - 0.5 Y = 50+ 7000

=> 0.5 Y = 7,050

=> Y = 7,050/ 0.5 = 14,100 rupees

At equilibrium level of Income, consumption expenditure is

50 + 0.5 ( 14,100)

= 50 + 7,050

= Rs. 7,100