Question

Consider a hypothetical economy described by the following equations:

C = 100 + 0.8Yd

I = 1200

G = 1000

X = 1110

M = 200 + 0.25Y

T = 250 + 0.3Y

Required:

i) Compute the equilibrium level of national income. (5marks)

ii) The level of consumption, income after tax and net exports that corresponds to the equilibrium level of national/income.

Answer 1

$Consumption Function is C = 100+ 0.8 Y$

 $where Y in the income in the economy.$

At equilibrium level of income,

 

$AS=AD$

$Y= C+I$  

$Y= 100 + 0.8 Y + 1200$

$Y - 0.8 Y = 100 + 1200$

$0.2 Y = 1300$

$Y = 1300/ 0.2 = 7500$

Equilibrium level of national income$= 7500$

ii) $Y = C + I + G$

$7500 = C + 1200 +1000$

$C = 7500-2200$

$level of consumption = 5300$