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From the following information about an economy, calculate (i) its equilibrium level of national income and (ii) savings at equilibrium level of national income. Consumption function : C = 200 + 0.9Y (where C = Consumption expenditure and Y = National income) Investment expenditure : I = ₹ 3,000. |
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Answer» (i) At equilibrium level of national income, the fundamental condition is that investment and savings must be equal to each other. In the problem, investment expenditure is given ₹3,000. It implies that at equilibrium, savings should also be 3,000. Savings = Income – Consumption = Y – [200 – 0.9Y] Equation for desired savings of ₹ 3,000 will be as under : Y – [200 + 0. 9Y] =3,000 Y – 200 – 0.9Y = 3,000 Y – 0.9Y = 3000 + 200 0.1 Y = 3,200 Y = ₹ 32,000 , At 32,000 both savings and investment are equal. Therefore, equilibrium level of national income is 32,000. (ii) Consumption at equilibrium level will be as under : C = 200 + 0.9Y = 200 + 0.9 x 32,000 = 200 + 28,800 = 29,000 Savings = Income – Consumption = 32,000 – 29,000 = ₹ 3,000 |
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