Question

In an economy C= 200+ 0.5 Y is the consumption function where C is the consumption expenditure and Y is the national income. Investment expenditure is ₹ 400 crores. Is the economy in equilibrium at an income level ₹ 1500 crores? Justify your answer.

Answer 1

1. Using the Expenditure approach to GDP, Y=C+I+G Y=200 + 0.75(Y-200)+200+300 Y=700+0.75Y-150 0.25Y=550 Y=2200 2. Aggregate Consumption Level C=200+0.75(Y-T) C=200+0.75(2200-200) C=200+1500=1700 3. Y=C+S Y-C=S S=2200-1700=500 4.MPC is the coefficient

Answer 2

Given details:

Consumption function of an economy is given by

C=200 + 0.5 Y

Here, C is consumption expenditure and Y is National Income .

Investment expenditure (I) = ₹ 400 Crores.

Solution

For an economy to be in equilibrium, it must satisfy the function  Y = C + I.

In the given scenario,

Y =  200 + 0.5 Y + 400

0.5 Y = 600

Y = ₹ 1200 Crores.

So, economy will be in equilibrium only if Y = 1200.

But, If the income level is ₹ 1500 Crores, it is not in equilibrium, since it has value more than required amount of ₹ 1200 Crores.