How do you find equilibrium? (1 Viewer)

[k150764]

The question is:

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

I am so stuck on this equilibirum is when saving=investment?
this question is so confusing
please help!

 

[munchiecrunchie]

hello,

here's a solution to help you out.

Information given:

C = 100 + 0.8Y

I = 40

Now you know that the equilibrium condition is that S = I. You already know I; however you do not know S, so you will have to manipulate the information that you have to find S.

Note that C = autonomous + induced(MPC x income)

So therefore, the MPC = 0.8

And so MPS = 0.2

therefore, S = Y x MPS
= 0.2Y

The equilibrium condition is that S = I, therefore 0.2Y = 40

And therfore Y = 40/0.2
= 200