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Question
C = 100 + 0.4 Y is the Consumption Function of an economy where C is Consumption Expenditure and Y is National Income. Investment expenditure is 1.100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of national income.
Solution
Given that
C = 100 + 0.4Y
I = 1100
(i) Equlibrium level of National Income
At equilibrium level, AD = AS or Y = C + I
By substituting the values of C and I in the formula, we get
Y = 100 + 0.4Y + 1100
Y - 0.4Y = 100 + 1100
0.6Y = 1200
Y = `1200/0.6` = 2000
(ii) Consumption expenditure at equlibrium level of National Income
C = 100 + 0.4Y
By substituing the value of national income at equlibrium level in the formula, we get
C = 100 + 0.4(2000)
C = 100 + 800 = 900
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