Question

In an economy S = - 50 + 0.5Y is the saving function (where S = saving and Y = national income) and investment expenditure is 7,000. Calculate

(i) Equilibrium level of national income.

(ii) Consumption expenditure at equilibrium level of national income.

• A. (i) 12,100 (ii) 12,100
• B. (i) 12,100 (ii) 7,100
• C. (i) 7,100 (ii) 14,100
• D. (i) 14,100 (ii) 7,100

Answer 1

The correct option is D

(i) 14,100

(ii) 7,100

(i) Given, S = - 50 + 0.5Y

and I = 7,000

At the equilibrium level,

$\Rightarrow$ S = I

-50 + 0.5Y = 7,000

0.5Y = 7,000 + 50

0.5Y = 7,050

$Y=\frac{7,050}{0.5}$

$\Rightarrow$ Y = 14,100

(ii) At Y = 14,100

Saving, S = - 50 + 0.5(14,100)

= - 50 + 7,050

$\therefore$ S = 7,000

Consumption expenditure, C = Y - S

$\Rightarrow$ $=14,100-7,000$

$=7,100$

Alternative Method

At equilibrium level,

Saving = Investment

Saving = 7,000

Consumption expenditure, C = Y - S

= 14,100 - 7,000

= 7,100.

(i) Equilibrium level of national income = 14,100.

(ii) Consumption expenditure at equilibrium level of national income = 7,100.