Question

The consumption function is expressed as: C = 100 + 0.25 Y (where C = consumption expenditure and Y = National Income). Calculate saving if consumption expenditure at equilibrium level of national income is Rs. 500 crores. (Saving = Rs. 1,100 cores)

Answer 1

The consumption function is C= 100+0.25Y where Y is the income at different level in the economy.

At equilibrium level of income, consumption is

100+0.25 Y = 500

=> 0.25 Y = 400

=> Y = 400/ 0.25 = 1,600 crores

At equilibrium level,

Income = consumption + savings

=> 1,600 - 500 = savings

=> savings = 1,100 crores