question_answer

From the following data about an economy, calculate (a) equilibrium level of national income and (b) total consumption expenditure at equilibrium level of national income.

(i) C = 200 + 0.5Y is the consumption function where C is consumption expenditure and Y is national income.

(ii) Investment expenditure is 1,500.

Answer:

Given, consumption function, \[C=200+0.5Y\],

Investment, I = 1,500

We know that, \[Y=C+I\]

\[Y=200+0.5Y+1,500\]

or         \[Y=1,700+0.5Y\]

or         \[0.5Y=1,700\]

or         \[Y=1,\,7000\,\times \frac{10}{5}=3,400\]

(a) Equilibrium level of National Income, Y = 3,400

(b) Total Consumption Expenditure, \[C=200+0.5Y\]

\[=200+0.5(3,400)\]

\[=200+1,700=1,900\]