Question

In an economy the autonomous investment is 100 and the consumption is C= 80 +0.4Y. Is the economy in equilibrium at an income level 400? Justify your answer.
(Equilibrium Income = 300; As given income of 400 is greater than equilibrium level of income, the economy is not at equilibrium. It is at a situation where AD is greater than aggregate output produced in the economy)

Answer 1

Consumption Function is C = 80+ 0.4 Y where Y in the income in the economy.

At equilibrium level of income,

AS=AD

Y= C+I

=> Y= 80 + 0.4 Y + 100

=> Y - 0.4 Y = 80 + 100

=> 0.6 Y = 180

=> Y = 180/ 0.6= 300.

Therefore, equilibrium income will be 300 and not 400.