Question

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

Answer 1

Equilibrium is achieved when:

$\text{Y = C+I}$

Or, when $\text{S=I}$

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

$=100+0.75(4,400)$

$=100+3,300$

$=3,400$

We know, $\text{MPS=1-MPC}$

$=1-0.75=0.25$

Given that $\overline{\text{C}}=100$, we can determine that $\overline{\text{S}}=-100$.

Thus, S at equilibrium: $\text{S}=-100+0.25(4,400)$

$=-100+1,100$

$=1,000$

I at equilibrium = 1,000