Question

In an economy, the consumption function is C = 600 + 0.9 Y, where C is consumption expenditure and is income. Calculate the equilibrium level of income and consumption expenditure, when investment expenditure is 500.
(Equilibrium level of income 11,000; Consumption expenditure = 10,500.)

Answer 1

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 600+ 0.9 Y + I

=> Y - 0.9 Y = 600+ 500

=> 0.1 Y = 1,100

=> Y = 1,100/ 0.1 = 11,000

At equilibrium level of Income, consumption expenditure is

600 + 0.9 ( 11,000)

= 600 + 9,900

= 10,500