Question

1. Calculate the equilibrium level of income if C = R100 million + 0,8Y and Ī = R125 million.[5

Answer 1

Equilibrium condition is

$$S=I$$

$$s=Y-C=Y-a-b\times{Y}=-a+(1-b)\times{Y}$$

for

$$I=I$$

The condition becomes

$$-a+(1-b)\times{Y}=I$$

Therefore the equilibrium level of income is

$$Y=\frac{1}{1-b\times(a+I)}$$

From the consumption equation

$$C=100+0.8\times{Y}$$

We find a and 1-b

$$-a=-100$$ $$b=1-0.8=0.2$$

Substituting into saving and investment equation gives

$$-100+0.2\times{Y}=125$$

$$0.2\times{Y}=225$$ $$Y=Rs 1125m$$