In a closed economy, the consumption function is given by $C = 30 + 0.6 (Y - T)$ , investment $I = 80$ , government expenditure $G = 120$ , taxes are $T = 0.2 Y$ , and net exports are zero. What is the equilibrium national income $Y$ (in billions of rupees)?

easy MCQ 2 marks Class 12 · Economics · Determination of Income and Employment

Answer

442

The correct answer is $442$ — Step 6: Round to nearest whole number: $Y = 442$ billion rupees.

Step-by-step solution

Step 1: Express disposable income $Y - T = Y - 0.2 Y = 0.8 Y$ .
Step 2: Substitute into consumption function: $C = 30 + 0.6 (0.8 Y) = 30 + 0.48 Y$ .
Step 3: Total planned expenditure (aggregate demand) is $A D = C + I + G = (30 + 0.48 Y) + 80 + 120 = 230 + 0.48 Y$ .
Step 4: Set equilibrium condition $Y = A D$ : $Y = 230 + 0.48 Y$ .
Step 5: Solve for $Y$ : $Y - 0.48 Y = 230; \Rightarrow; 0.52 Y = 230; \Rightarrow; Y = \frac{230}{0.52} \approx 442.31$ .
Step 6: Round to nearest whole number: $Y = 442$ billion rupees.

Common mistake: Forgetting to subtract taxes before computing consumption

Concept tested: Equilibrium income using Keynesian cross