National Income Accounting

Question

C = 100 + 0.4 Y is the Consumption Function of an economy where C is Consumption Expenditure and Y is National Income. Investment expenditure is 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of national income.

Answer

(1) Calculation of equilibrium level of national income:
Given, Consumption Function (C) =100+0.4Y
Investment expenditure (I) = 1,100
At equilibrium level AD= AS OR y= C+I 
By substituting values
Y=100+0.4Y + 1100
Y – 0.4Y = 1200
0.6Y=1200
OR Y =2000
Hence equilibrium level of national income = 2000

(2) Calculation of Consumption expenditure at equilibrium level of national income:
C= 100+0.4Y (Given)
Equilibrium level of national income = 2000
C= 100+0.4 *2000
C = 100+ 800
Therefore Consumption expenditure (C) at equilibrium level of national income (2000) = 900

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