question_answer

C = 100 + 0.4Y is the Consumption Function of an economy where C is Consumption Expenditure and Y is National Income. Investment expenditure is 1100. Calculate

(i) Equilibrium level of National Income.

(ii) Consumption expenditure at equilibrium level of National Income.

Answer:

Given, Y = National Income, Consumption Function, \[C=100+0.4Y\], Investment Expenditure, I = 1,100

(i) Now, \[Y=C+I\]

\[\therefore \]      \[Y=100+0.4Y+1,100\text{ }or\text{ }y-0.4y=1200\text{ }or\text{ }0.6Y=1,200\]

\[\therefore \] Equilibrium level of National Income, Y \[=1,200~\times \frac{10}{6}=2,000\]

(ii) Now, \[C=100+0.4Y\text{ }or\text{ }C=100+0.4(2,000)\]

Consumption, C \[=100+800=900\]