Q.Suppose consumption function for an economy is C = 80 + 0·75 Y (where C = consumption function and Y = national income) and the investment expenditure is ₹ 200 crore. Estimate the following : (2+2=4)

In a two-sector economy, the equilibrium level of income is determined where Aggregate Demand (AD) equals Aggregate Supply (AS), or equivalently, where planned saving (S) equals planned investment (I).

Given:

Consumption function: $C = 80 + 0.75Y$

Investment expenditure: $I = ₹ 200$ crore

1. Equilibrium level of income: At equilibrium, $Y = C + I$. Substitute the given values: $Y = (80 + 0.75Y) + 200$ $Y = 280 + 0.75Y$ $Y - 0.75Y = 280$ $0.25Y = 280$ $Y = \frac{280}{0.25}$ $Y = 1120$
2. Values of consumption and saving at equilibrium level of income: At equilibrium income $Y = ₹ 1120$ crore: Consumption ($C$): …

In macroeconomics, the equilibrium level of income in an economy is the point where the total amount of goods and services produced (Aggregate Supply, AS) is exactly equal to the total amount of goods and services demanded (Aggregate Demand, AD). Conceptually, this means that there is no unplanned accumulation or depletion of inventories, and firms have no incentive to change their output levels.

In a simple two-sector economy, Aggregate Demand (AD) consists of consumption expenditure (C) by households and investment expenditure (I) by firms. Aggregate Supply (AS) is equivalent to National Income (Y), as all income generated from production is either consumed or saved. Therefore, the equilibrium condition can be stated as $Y = AD$, or more specifically, $Y = C + I$. An alternative, but equivalent, equilibrium condition is when planned saving (S) equals planned investment (I), i.e., $S = I$. This is because if $Y = C + I$ and we know that $Y = C + S$ (income is either consumed or saved), then by substituting C+S for Y, we get $C + S = C + I$, which simplifies to $S = I$.

Let's use the given information to estimate the required values.

Given:

Consumption function: $C = 80 + 0.75Y$

Investment expenditure: $I = ₹ 200$ crore

(a) Equilibrium level of income

To find the equilibrium level of income, we use the condition that Aggregate Demand equals National Income.

1. Substitute the given consumption function and investment into the equilibrium condition:

   $Y = (80 + 0.75Y) + 200$

2. Combine the constant terms:

   $Y = 280 + 0.75Y$

3. Rearrange the equation to solve for Y:

   $Y - 0.75Y = 280$

   $0.25Y = 280$

4. Isolate Y:

   $Y = \frac{280}{0.25}$

   $Y = 280 \times 4$

   $Y = 1120$

The equilibrium level of income is ₹ 1120 crore.

(b) Values of consumption and saving at equilibrium level of income

Now that we have the equilibrium income, we can find the corresponding values of consumption and saving.

Consumption (C)

1. Substitute the equilibrium level of income ($Y = 1120$) into the consumption function: $C = 80 + 0.75Y$ $C = 80 + 0.75(1120)$ …