Question

You are given the following information about a closed economy with no government:

Consumption = 445 + 0.75Y

Investment = 250

Use the above information to answer the questions that follow:

Q.4.1 Calculate the value of autonomous spending

Answer 1

Let's find equilibrium income first:

AS$=$ AD

Y$=$ C$+$ I

$Y=445+0.75Y+I$

$Y-0.75Y=445+250$

$0.25Y=695$

$Y=2780$

Consumption function is $C=445+0.75Y$ where Y is the income in the economy. So at national income 2780, consumption spending is:

$C=445+0.75Y$

$=445+0.75(2780)$

$=445+2085$

$=2530$