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Question

The consumption function in an economy is C = 80 + 0.6Y and investment level in an economy is 800 crores. State whether the following are true or false:
(a) Equilibrium level of income is 2100 crores.
(b) 275 crores is the total change in income if investment rises by 150 crores.
(c) Value of multiplier is 2.5.
 


Solution

C = 80 + 0.6Y
(a) False,
(a) At equilibrium level, AD = AS 
C + I = Y 
80 + 0.6Y + 800 = Y 
Y = 2200
(b) False, 
Change in Investment = 150 crores
K (Multiplier) = 11MPC 
= 110.6 = 2.5
K = YI 

2.5 = Y150 

Y = 375

(c) True, 
K = 2.5 
 


Economics

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