Question

In an economy the consumption function is C = 500 + 0.8Y where C is consumption expenditure and Y is income. Calculate the equilibrium level of income and consumption expenditure when investment expd. is 500.

Answer 1

(i) Given C = 500 + 0.8y

I = 500

We know, Y = C + I 

Y = 500 + 0.8y + 500

Y – 0.08y = 1000

y = 1000/0.2 = 5000

(ii) C = Y – I

= 5000 – 500

= Rs. 4500 Crores