My answer for (d) was 1600. but the guide says its 3600, are the correct in their caluculation?
Consider a closed economy with no government sector in which consumption (C) is related to income (Y) by the equation:C = A + cY
(a) What is the marginal propensity to consume?
c
(b) How is the level of savings related to income in this economy?
S = Y - A - cY
Suppose that A = 400, c = 0.75 and the level of investment is 500:
(c) At what level of national income would savings be zero?
National income,Y =
(d) What would be the equilibrium level of income?
Equilibrium level of income,Y =
Explanation:
(a) c.
(b) Given S = Y – C, S = Y – A – cY, or S = –A + (1 – c) Y
(c) With S = –400 + 0.25 Y, if S = 0, Y = 1600.
(d) We now have C = 400 + 0.75 Y, and equilibrium occurs when aggregate supply equals aggregate demand, i.e. when Y = C + I; that is, when Y = 400 + 0.25 Y + 500.
Solving for Y, we find that equilibrium is at Y = 3600.
Consider a closed economy with no government sector in which consumption (C) is related to income (Y) by the equation:C = A + cY
(a) What is the marginal propensity to consume?
c
(b) How is the level of savings related to income in this economy?
S = Y - A - cY
Suppose that A = 400, c = 0.75 and the level of investment is 500:
(c) At what level of national income would savings be zero?
National income,Y =
(d) What would be the equilibrium level of income?
Equilibrium level of income,Y =
Explanation:
(a) c.
(b) Given S = Y – C, S = Y – A – cY, or S = –A + (1 – c) Y
(c) With S = –400 + 0.25 Y, if S = 0, Y = 1600.
(d) We now have C = 400 + 0.75 Y, and equilibrium occurs when aggregate supply equals aggregate demand, i.e. when Y = C + I; that is, when Y = 400 + 0.25 Y + 500.
Solving for Y, we find that equilibrium is at Y = 3600.