Question

From the following data about an economy, calculate its equilibrium level of income:

(i) Autonomous Consumption = 400
(ii) Marginal Propensity to Consume = 0.5
(iii) Investment = 4000

Answer 1

Given:
Autonomous consumption, $\overline{C}=400$
Marginal Propensity to Consume, MPC = 0.5
Investment, I = 4000
We know that
Y = C + I and C = $\overline{C}$ + b(Y)
Therefore, Y = $\overline{C}$ + b(Y) + I $⟹$ Y = 400 + 0.5(Y) + 4000
$⟹$ Y - 0.5Y = 4400
Y = 8800

Equilibrium level of income will be 8800