Determination Of Income And Employment

Question

In an economy, C = 300 + 0.8Y and I = 500 (where C = Consumption, Y = Income, I = Investment). Calculate the following:
(i) Equilibrium level of income,
(ii) Consumption expenditure at equilibrium level.

Solution

(i) For equilibrium

straight Y space equals space straight C space plus space straight I space space space space space space left parenthesis or space AS space equals space AD right parenthesis

straight Y space equals space 300 space plus space 0.8 straight Y space plus space 500

(substituting values of C and I)

straight Y space minus space 0.8 straight Y space equals space 800

0.2 straight Y space equals space 800 space space or space space space 2 over 10 straight Y space equals space 800

straight Y space equals space 4000 space space space space space space space space space space space space space left parenthesis This space is space equilibrium space level space of space income right parenthesis

(ii)

straight Y space equals space 4000

(This is equilibrium level of income)

straight Y space equals space straight C space plus space straight I

4000 space equals space straight C space plus space 500 space space space space space straight C space space equals space 4000 space minus space 500 space equals space 3500 space space space left parenthesis This space is space consumption space expenditure right parenthesis

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