Question

Given C = 400 + 0.9Y and I = 4,000, find : (i) equilibrium Y, (ii) S and C at equilibrium Y.

Answer 1

Equilibrium Y is found when, Y = C + I

Substituting the values, we get :

Y = 400 + 0.9Y + 4,000

Or, $Y-0.9Y=400+4,000\Rightarrow 0.1Y=4,400$

Thus, $Y=\frac{4,400}{0.1}=44,000$

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

$=400+0.9(44,000)$

$=400+39,600=40,000$

S at equilibrium : $S=-\overline{S}+MPS.Y$

$=-400+0.1(44,000)$

$=-400+4,400=4,000$

Alternatively, in equilibrium, S = I

Since I = 4,000 (given), S must be equal to 4,000.