In an economy, the consumption function is C `=500 + 0.75Y` , where C is consumption expenditure and Y is income. Calculate the equilibrium level of income and consumption expenditure, when investment expenditure is 5,000.

Answer

Equilibrium level of income = 22,000; Consumption expenditure at equilibrium level of income = 17,000.

Explanation

("i) Equilibrium level of National Income (Y)
At Equilibrium ,Y =C+l [:'AD= AS = Y and AD =C+l]
Or , Y `=500+0.75Y+5,000` [:' C=500+0.75Y]
0.25Y = 5,500
Y `= 22,000`
(ii) Consumption expenditure at equilibrium level of national income.
Putting value of National Income of 22,000 in consumption function , we get:
`C= 500 + 0.75 xx 22,000`
C= 17,000