In a hypothetical economy, the consumption function is given as C = 100 + 0.75Y. The autonomous investment in the economy is 200 crores. The equilibrium level of income would be______?
In a hypothetical economy, the consumption function is given as C = 100 + 0.75Y. The autonomous investment in the economy is 200 crores. The equilibrium level of income would be______?
Solution
Option 1 -> Using Y = C + I equilibrium condition gives 1200 crores.
Option 2 -> Incorrect calculation of equilibrium income.
Option 3 -> Incorrect calculation of equilibrium income.
Option 4 -> Incorrect calculation of equilibrium income.
Hence, Option 1: 1200 crores -> At equilibrium, Y = C + I. Substituting the values: Y = (100 + 0.75Y) + 200, which simplifies to Y = 300 + 0.75Y. Solving: 0.25Y = 300, therefore Y = 1200 crores. The multiplier is 1/(1-MPC) = 1/0.25 = 4, so autonomous spending of 300 crores generates equilibrium income of 1200 crores. -> correct
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