Question

Find equilibrium S and equilibrium I when Y = 4,400, MPC = 0.75, and $\overline{C}=100.$

• A. S = 1,000
  I = 1,200
• B. S = 1,200
  I = 1,200
• C. S = 1,000
  I = 1,000
• D. S = 1,150
  I = 2,000

Answer 1

The correct option is C

S = 1,000
I = 1,000

Equilibrium is struck when.

Y = C + I

Or, when S = I

C at equilibrium : $C=\overline{C}+MPC.Y$

= 100 + 0.75(4,400)

= 100 + 3,300

= 3,400

We know, MPS = 1 - MPC

= 1 - 0.75 = 0.25

Thus, S at equilibrium S = - 100 + 0.25(4,400)

= - 100 + 1,100

= 1,000

Alternatively : Y = C + S

S = Y - C = 4,400 - 3,400 = 1,000

In equilibrium, S = I

We know, S = 1,000

Accordingly, I = 1,000