question_answer

In an economy C = 200 + 0.75 Y is the consumption function where C is consumption expenditure and Y is national income. Investment expenditure is 4,000. Calculate equilibrium level of income and consumption expenditure.

Answer:

Consumption function, \[C=200+0.75Y\] Investment, I = 4,000

Now \[Y=C+I\] or \[Y=200+075Y+4,000\]

\[Y0.75Y=4,200\] or \[0.25Y=4,200\]

\[\Rightarrow \]   \[Y=4,200\times ~\frac{100}{25}\] Income, \[Y=16,800\]

Consumption expenditure, \[C=200+0.75Y\]

\[=200+0.75(16,800)\]

\[=200+12,600=12,800\]