Question
In a two-sector economy, the consumption function and investment function are: C = 60 + 0.8Y and I = 60. Calculate (i) Equilibrium level of income; (ii) Consumption at equilibrium level, and (iii) Saving at equilibrium level.
Solution
(i)For equilibrium level of income,
Y = C + I
Substituting the values of C and I
(ii) Consumption
iii) Saving S = Y (income) - C (consumption)
= 600 – 540 = 60
Tips: -
Equilibrium level of income is determined where (i) AS = AD (i.e., Y + C = I), and (ii) Planned Savings = Planned Investment (i.e., S = I). Two main tools are (i) Aggregate demand or expenditure, and (ii) Aggregate output (supply) or income.
