In a simple two-sector economy, the autonomous consumption is 200, the Marginal Propensity to Consume (MPC) is 0.75, and the autonomous investment expenditure is 300. Calculate the equilibrium level of national income (Y).

Solution

Identify the given values: •Autonomous Consumption (C) = 200 •Marginal Propensity to Consume (b or MPC) = 0.75 •Investment (I) = 300 State the Consumption Function: The consumption function is given by the formula: C = C + bY Substituting the values: C = 200 + 0.75Y Set up the Equilibrium Equation: At equilibrium, National Income (Y) is equal to the sum of Consumption and Investment: Y = C + I Substitute the consumption function and the investment value into the equation: Y = (200 + 0.75Y) + 300 Solve for Y: •Combine the autonomous parts: Y = 500 + 0.75Y •Bring the Y terms to one side: Y - 0.75Y = 500 0.25Y = 500 •Calculate the final value: Y = 500/0.25 Y = 2,000