Question

Suppose that the economy is characteised by the following behavioral equations C=Co +c1Yd
Where : Co=280
I=270
G=300
T=200
Marginal propensity to save (MPS) is 0.4(or 40%)
Solve for
a) equlibrum Gdp (Y)
b) disposable income (Yd)
C) Consumption spending (C)

Answer 1

$a) c1=1-MPS; c1=1-0.4=0.6; Yd=Y-T;$

$Y=C+I+G; Y=280+0.6×(Y-200)+270+300; Y=730+0.6Y;$

$0.4Y=730;$

$Y=$ $ $1825;$

$b)Yd=1825-200=$ $$1625;$

$c) C=280+0.6×1625=$ $ $1255;$