Question

a)     A hypothetical economy is given by the following identities:

C = 3000

I = 2000

G = 2500

T = 0.2Y

MPC = 0.5

X=6500

Z=5500 + 0.2Y

                   i.           Find the equilibrium level of income.

               

Answer 1

$Y=3,000+0.5(Y−0.2Y)+2,000+2,500+6,500−5,500−0.2Y$

$Y=3,000+0.4Y+2,000+2,500+6,500−5,500−0.2Y$

$Y=14,000−5,500+0.2Y$

$Y=8,500+0.2Y$

$0.8Y=8,500$

$Y=10,625$

Equilibrium level of income $= 10625$