CA Foundation · Business Economics · Determination of National Income
In an economy, the consumption function is C = 100 + 0.8Yd, where Yd is disposable income. Investment is ₹250 crore, government spending is ₹150 crore, and the government levies a proportional income tax at 25% (T = 0.25Y), with no transfers. What is the equilibrium national income?
Equilibrium income is ₹1,250 crore. Setting Y = 100 + 0.8(0.75Y) + 250 + 150 gives Y = 500 + 0.6Y, so 0.4Y = 500. Proportional taxation lowers the effective marginal propensity to consume to 0.6, so income is 500 divided by 0.4.
- A₹2,000 croreCorrect
- B₹1,250 crore
- C₹1,000 crore
- D₹1,600 crore
Explanation
Y = C + I + G = 100 + 0.8(0.75Y) + 250 + 150 = 500 + 0.6Y. So 0.4Y = 500 and Y = ₹1,250 crore. Check: C = 100 + 0.6 x 1,250 = 850; 850 + 250 + 150 = 1,250. So the correct value is ₹1,250 crore, not ₹2,000 crore (which ignores the tax).
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