Question

C = 50 + 0.5 Y is the consumption function where C is consumption expenditure and Y is National Income and investment expenditure is 2,000 in an economy. Calculate:

(i) Equilibrium level of (national) income;
(ii) Consumption expenditure at equilibrium level of (National) income.

Answer 1

The equilibrium level of national income (Y) is calculated as 4,100 by setting the total output equal to total expenditures. The consumption expenditure at this equilibrium level is 2,100.

Step-by-step explanation:

To find the equilibrium level of national income in an economy, we use the formula where the total output (Y) is equal to the total expenditure. In this case, the consumption function is given as C = 50 + 0.5Y, where C represents consumption expenditure and Y is the national income. Additionally, investment expenditure (I) is given as 2,000. Therefore, the equilibrium condition is Y = C + I.

Solving for the equilibrium level of national income, Y, we set up the equation Y = 50 + 0.5Y + 2000. To find the value of Y at equilibrium, we solve for Y, getting Y = 4100. Then we can find the consumption expenditure at equilibrium by substituting Y back into the consumption function, which gives us C = 50 + 0.5 * 4100, resulting in a consumption expenditure of 2100 at the equilibrium level of national income.