Question

Suppose the level of autonomous investment in an economy is rs. 200 crors and consumption function of the economy is; c = 80 + 0.75y 1. What will be the equilibrium level of income? 2. What will be the increase in national income if investment increases by rs. 25 crores?

Answer 1

Answer:

1. 1120

2.1220

Explanation:

1.

The aggregate expenditure is

AE=C+I=280+0.75Y

At equilibrium AE=Y

Therefore, 280+0.75Y=Y

$Y=280+0.75Y\\or, (1-0.75)Y=280\\or,0.25Y=280\\or,Y=280/0.25 \\\\Y=1120$

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2.

If I increases by 25, the AE is

$AE =305+0.75Y$

Therefore,

$Y=305+0.75Y\\or, (1-0.75)Y=305\\or,0.25Y=305\\or,Y=305/0.25 \\\\Y=1220$