equilibrium level of national income (1 Viewer)

[dat202hoe]

So I'm having trouble doing this question.

8 What is the equilibrium level of income if C = 100 + 0.8Y and I = 40?
(A) 100
(B) 140
(C) 500
(D) 700

I've got that

AD=C + I
= 100 + 0.8Y + 40

But then I get confused. You add C and I together and switch to MPS?

=140 + 0.2Y

Then I divide 140 by 0.2 and get 700.

Can someone explain this to me? It's basically the switch to MPS part that's confusing me; the textbook doesn't explain it well.

Maybe I'm doing the whole thing wrong?

 

[S.T.P]

Y=C+I
Y=100 + 0.8Y +40 {since C=100 + 0.8Y}
0.2Y=140 {1-0.8}

Y= 700 {140/0.2}

 

[al123456]

mmm im still confused can someone explain this Q to me?
Find the equilibrium national income in this economy:

Income Consumption Investment
0 1000 200
1000 1800 200
2000 2600 200
3000 3400 200

a) 1000
b) 200
c) 6000
d) 1200

the correct ans is C btw.

 

[FFC]

mmm im still confused can someone explain this Q to me?
Find the equilibrium national income in this economy:

Income Consumption Investment
0 1000 200
1000 1800 200
2000 2600 200
3000 3400 200

a) 1000
b) 200
c) 6000
d) 1200

the correct ans is C btw.

OK, your working to the first question was not the best - it might work, but I think an easier way of approaching it is the way S.T.P. did so.

So carrying that through:

In this economy, the survival consumption (i.e. consumption whilst income = 0) is 1000. Also shown is that for each 1000 increase in income, there is an extra 800 spent in consumption income - therefore MPC = 0.8.

As such, the consumption function is: C = 1000 + 0.8Y

ALSO, there is a level of investment of 200.

As such, TOTAL INCOME IN THE ECONOMY = Y = 1000 + 0.8Y + I
= 1000 + 0.8Y + 200
= 1200 + 0.8Y
Solving for Y gives 0.2Y = 1200, therefore Y = 1200*5 = 6000


Therefore the answer is C.



As an extra note:

You don't need to "switch to MPS" in these types of questions. Basically, equilibrium will occur when S = I. So if we were to extend your table til income = 6000, we would have C = 1000 + 0.8*6000 (remember from the function above?), which means consumption expenditure would = 5800. This means that of 6000 income, 5800 is spent on consumption, i.e. 200 is saved. In this economy, autonomous investment also equals 200. Therefore this is the point of equilibrium national income.


Does this make sense?