Question
Given, the consumption function, C = 150 + 0.6Y, where C = consumption expenditure, Y = income and investment expenditure = Rs 2,000. Calculate:
(i) Equilibrium level of national income
(ii) Consumption at equilibrium level of national income
(iii) Saving at equilibrium level of national income
(i) Equilibrium level of national income
(ii) Consumption at equilibrium level of national income
(iii) Saving at equilibrium level of national income
Answer: Option B
:
B
(i) Given, C = 150 + 0.6Y and I = 2,000
At the equilibrium level,
Y = C + I
⇒ Y = 150 + 0.6Y + 2,000 ⇒ Y = 2,150 + 0.6Y
Y - 0.6Y = 2,150 ⇒ 0.4Y = 2,150
Y=2,1500.4=5,375
(ii) Consumption, C = 150 +0.6(5,375)
= 150 + 3,225 = 3,375
(iii) We know that, Y = C + S
⇒ S = Y - C = 5,375 - 3,375 = 2,000
Alternatively,
Given : C = 150 + 0.6Y,
S = -150 + 0.4Y (∵ MPC = 0.6, accordingly MPS = 1 - 0.6 = 0.4)
Or, S= -150 + 0.4(5,375)
= -150 + 2,150 = 2,000.
(i) Equilibrium level of national income = Rs 5,375.
(ii) Consumption expenditure at equilibrium level of national income = Rs 3,375.
(iii) Saving at equilibrium level of national income = Rs 2,000.
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:
B
(i) Given, C = 150 + 0.6Y and I = 2,000
At the equilibrium level,
Y = C + I
⇒ Y = 150 + 0.6Y + 2,000 ⇒ Y = 2,150 + 0.6Y
Y - 0.6Y = 2,150 ⇒ 0.4Y = 2,150
Y=2,1500.4=5,375
(ii) Consumption, C = 150 +0.6(5,375)
= 150 + 3,225 = 3,375
(iii) We know that, Y = C + S
⇒ S = Y - C = 5,375 - 3,375 = 2,000
Alternatively,
Given : C = 150 + 0.6Y,
S = -150 + 0.4Y (∵ MPC = 0.6, accordingly MPS = 1 - 0.6 = 0.4)
Or, S= -150 + 0.4(5,375)
= -150 + 2,150 = 2,000.
(i) Equilibrium level of national income = Rs 5,375.
(ii) Consumption expenditure at equilibrium level of national income = Rs 3,375.
(iii) Saving at equilibrium level of national income = Rs 2,000.
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