Question

C=100+0.4Y is the consumption function expenditure and Y is national income. Investment expenditure is Rs.1100/-. Calculate:
i) Equilibrium level of national income.
ii) Consumption expenditure at equilibrium level of national income.

Answer 1

Answer: As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption (\bar { A\quad } ) = Rs 50 crore MPS = 0.2

So, MPC(b) = 1 – 0.2 = 0.8

(MPC = 1 – MPS)

AD = C + I

AD = \bar { C } + bY + I = \bar { A\quad } + bY

= 50 + 0.8Y (\bar { A\quad } =\bar { C } +\bar { I } )

As we know, the equilibrium level of national income in two-sector model is determined where,

AS = AD

Y = 50 + 0.8Y

4000 = 50 + 0.8(4000)

4000 = 50 + 3200

4000 =3250

Hence, the economy is not in equilibrium.

Answer 2

Explanation:

i) Equilibrium level of national income.

ii) Consumption expenditure at equilibrium level of national income.