Saving function of an economy is given by, S = -100 + 0.2Y. Find out the corresponding consumption function. If autonomous investment is Rs 100 crore, what will be the equilibrium GDP of the economy?

Solution:

Given,                             S = -100 + 0.2 Y
                                      I₀ =Rs 100 crore
We know that
                                      Y = C + S
=>                                  C = Y-S
=>                                  C = Y- (100 +0.2 Y)
=>                                  C = Y + 100-0.2Y