Question

From the following data calculate the equilibrium level of national income:
Autonomous Consumption = 500
Marginal Propensity to Save = 0.2
Investment = 2,000
(Equilibrium Level of National Income = 12,500)

Answer 1

If MPS=0.2, then

MPC= 1-MPS= 1-0.2= 0.8

Consumption Function is C = 500+ 0.8 Y where Y in the income in the economy.

At equilibrium level of income,

AS=AD

Y= C+I

=> Y= 500 + 0.8 Y + 2,000

=> Y - 0.8 Y = 500 + 2,000

=> 0.2 Y = 2,500

=> Y = 2,500/ 0.2 = 12,500