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

₹22,000

The correct answer is option (2) : ₹22,000

The equilibrium level of income is found where aggregate expenditure (AE) equals income (Y). In a closed economy, AE is the sum of the consumption (C) and investment (I).

The consumption function is given as C= 500 + 0.75Y, and

Investment (I) = 5,000

The aggregate expenditure (A) will be

A= C + I = (500 + 0.75Y) + 5,000

At equilibrium, AE = Y so we set them equal to each other :

Y = (500+ 0.75Y) + 5,000

Now, solve for Y :

0.25 Y = 5,500

Y = $\frac{5500}{0.25}$

Therefore, the equilibrium level of income is ₹22,000