Question

Consumption =40+0.75Y

Investment =140-10i

Government expenditure =100

Tax =80

Money deposit =0.2Y-5i

Money supply =85

(i)Find equilibrium, Y, I ?

Answer 1

Equilibrium income $Y = C+1+G$

Disposable income $Yd = Y-T$

Therefore $Y= 40 + 0.75 (Y-80) + 140 - 10i + 100$

Removing the bracket we get

$Y= 40 + 0.75Y - 60 + 140 - 10i + 100$

Rearranging the equation and collecting the like terms together

We get $0.25Y = 220 - 10i$

Solving for Y by dividing both sides by 0.25

Equilibrium income is $Y* = 880 - 40i$

To work out for equilibrium interest we make i the subject of the formula

$40i= 880- Y$

dividing both sides by 40 we get

Equilibrium interest, $i* = 22 - 0.025y$