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      Question

      Consider an economy described by the following

      equations: C = 100 + 0.6 ∗ (Y − T) (consumption function) I = 200 − 1000 ∗ r (investment function) G = T = 100 (government purchase and tax) where Y is the national income and r is the interest rate. Assume r = 10%, What is the equilibrium income?
      A 300 Correct Answer Incorrect Answer
      B 400 Correct Answer Incorrect Answer
      C 500 Correct Answer Incorrect Answer
      D 600 Correct Answer Incorrect Answer
      E 700 Correct Answer Incorrect Answer

      Solution

      The planned expenditure is

      PE=0.6Y+240.

      Equalize the planned expenditure and the actual expenditure we have

      0.6Y+240=Y

      which gives Y*= 600.

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