In an economy C = 100 + 0.6Y is the consumption function where C is consumption expenditure and Y is the national income. Investment expenditure done by the government is Rs 500 crore. Will the economy be in equilibrium at Income of Rs 1700 crore?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: The economy is not in equilibrium and income needs to be less by 200 to be in equilibrium
We have been given the consumption function, C = 100 + 0.6Y and investment expenditure = Rs 500 crore
At equilibrium level Y = C + I
Y = (100 + 0.6Y) + 500
Y - 0.6Y = 600
0.4Y = 600
Y = 1,500
Thus, the equilibrium level of income is ₹1500 crore. Since the given income is ₹1700 crore, it is higher than equilibrium by ₹200. Therefore, income must decrease by ₹200 for the economy to be in equilibrium.