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Question
C = 50 + 0.5 Y is the Consumption Function where C is consumption expenditure and Y is National Income and Investment expenditure is 2000 is an economy. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of national income.
Solution
Given that
C = 50 + 0.5Y
I = 2000
(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 = 50 + 0.5Y + 2000
Y - 0.5Y = 50 + 2000
0.5Y = 2050
Y = 2050/0.5 = 4100
Thus, Equlibrium level of National Income is equal to 4100
(ii) Consumption expenditure at equlibrium level of National Income
C = 50 = 0.5Y
By substituing the value of national income at equlibrium level in the formula, we get
C = 50 + 0.5(4100)
C = 50 + 2050 = 2100
Thus, Consumption expenditure at equlibrium level of National Income is equal to 2100.
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