MC q (1 Viewer)

[nicksta_40]

What is the equilibrium level of income if C = 100 + 0.8Y and I = 40?

A 100
B 140
C 500
D 700

how do u work this out? it was the most incorrectly answered Q in the 2003 HSC

 

[jimmik]

the answer would be (D) 700

how do you figure that out? well, you know that Y = C + I and you are given C = 100 + 0.8Y and I = 40 so you just sub it into that first equation: Y = 100 + 0.8Y + 40 then solve for Y

 

[Acid]

It's 700. Equilibrium level of income is when S = I. So they give you the consumption function and you have to first work out the savings function, which is the inverse.

So:

S = -100 + 0.2Y

Sub in I = 40

40 = -100 + 0.2Y
140 = 0.2Y
Y = 700

 

[username]

or y = c + i acidddd

 

[underthebridge]

i was gonna ask about the simple multiplier, but is that what the 0.8Y is? with the 0.8 being the marginal propensity to consume? Im in yr11 btw so im just being curious.

 

[Acid]

i was gonna ask about the simple multiplier, but is that what the 0.8Y is? with the 0.8 being the marginal propensity to consume? Im in yr11 btw so im just being curious.

Simple multiplier is 1/MPS. So in this case it would be 1/0.2Y, which is 5. This means an increase in aggregate demand by $100 (just as an example) will result in $500 extra income generated in the economy.

Pretty sure that's how it works...haven't done much study for eco yet (i'm a crammer!)