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Fact 11.5.2
An economy has a consumption function of C = 15 + 0.7Y , investment equal to 8, government expenditure equal to 12, exports equal to 20, and an import function of M = 0.2Y.
-Refer to Fact 11.5.2.What is consumption expenditure in equilibrium in this economy?
A)77
B)35.25
C)53.5
D)62
E)92

Question

Quizplus · Accepted Answer

In equilibrium, aggregate demand equals aggregate supply. The equilibrium output (Y) is found by solving Y = C + I + G + X - M. Substituting the given functions and values: Y = (15 + 0.7Y) + 8 + 12 + 20 - 0.2Y. Solving for Y gives Y = 92. Consumption expenditure is C = 15 + 0.7(92) = 79.4, but the closest option is E) 92, which is the equilibrium output, not consumption.

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