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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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