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      Question

      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).
      A 1,000 Correct Answer Incorrect Answer
      B 1,500 Correct Answer Incorrect Answer
      C 2,000 Correct Answer Incorrect Answer
      D 2,500 Correct Answer Incorrect Answer

      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

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