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Question
From the data given below about an economy, calculate (a) investment expenditure and (b) consumption expenditure.
|
(i) |
Equilibrium level of income |
5,000 |
|
(ii) |
Autonomous consumption |
500 |
|
(iii) |
Marginal propensity to consume |
0.4 |
Solution
(a) Investment expenditure
We can denote consumption function as
C = C + (c)Y
Where, C ia autonomous consumption which is given as 500,
Y is equilibrium level of income which is given as 5000,
and,c is marginal propensity to consume which is given as 0.4
Substituting the values in the formula
C = 500 + (0.4) 5,000
C = 2,500
We know, at equilibrium level, Y = C + I
Thus, I = Y- C
or, I= 5000 - 2500 = 2500
(b) Consumption expenditure
As we know,
C = C + (c)Y
C = 500 + (0.4) 5000 = 2500
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