In an economy C = 500 + 0.9Y and I = 1000 (where C = Consumption, Y = Income, I = Investment). Calculate the following:
(i) Equilibrium level of income,
(ii) Consumption expenditure at equilibrium level of income.

Solution

(i) For equilibrium,

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

(i.e., AS = AD)

straight Y space equals space 500 space plus space 0.9 space straight Y space plus space 1000

(substituting values of C and I)

straight Y space minus space 0.9 straight Y space equals space 1500 space space space space space space space space 0.1 straight Y space equals space 1500 space space space space space space or space space space space 1 over 10 straight Y space equals space 1500

straight Y space equals space 15000

(Equilibrium level of income)
(ii)

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

15000 space equals space straight C space space plus space 1000 space space space space space space space straight C space equals space 15000 space minus space 1000 space equals space 14000

Consumption expenditure at equilibrium level of income = 14,000

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