The consumption function in an imaginary economy is known to be C = 100 + 0.75Y. The level of equilibrium income in this economy is 800 crores. What will be the value of investment in this economy?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 100 crores
In a simple Keynesian model, equilibrium occurs when aggregate expenditure (total spending) equals total output (income). Aggregate expenditure is the sum of consumption (C) and investment (I).
Step 1:
Given the consumption function: C = 100 + 0.75Y
Substitute the equilibrium income (Y = 800 crores):
C = 100 + 0.75 * 800
C = 100 + 600
C = 700 crores
Step 2:
At equilibrium: Aggregate Expenditure = Total Output (Income)
Aggregate Expenditure = C + I
800 crores = 700 crores + I
I = 800 crores - 700 crores
I = 100 crores