The model of national economy is characterised by the following data: Household

Question

The model of national economy is characterised by the following data: Household consumption C= 400 + 0.9*DI Gross investment lg 200 Government spending G-25e Sum of Taxes T 150 Disposable income DI-Y-T Calculate: a) Equilibrium level of income Y; b) Calculate the value of Marginal propensity to consume and value of Marginal propensity to save c) Private consumption at macroeconomic equilibrium; d) Develop equation of savi ng and calculate amount of saving at the point of equilibrium level of income.

Explanation / Answer

C = 400 + 0.9 DI

I = 200

G =250

T =150

DI =Y-T

Aggregate demand (AD) = C + I + G

Now, put C , I , G and T values in AD equation , we get :

AD = 400 + 0.9 (Y -150) + 200 + 250

(a) For equilibrium level of income , equate Y with AD,

Y = AD

Y = 400 + 0.9Y - 135 + 200 + 250

Y - 0.9Y = 850 -135

0.1 Y = 715

Y = 7150 [ Equilibrium levelmof income]

(b) Value of marginal propensity to consume is the change in the consumption due to one unit change in income . Therefore, value of marginal propensity to consume = 0.9. Value of marginal propensity to save = (1 - marginal propensity to consume) = 1- 0.9 = 0.1.

(c) Private consumption at macroeconomic equilibrium , C = 400 + 0.9(7150 -150)

C = 400 + 0.9(7000)

C = 400 + 6300

C = 6700

(d) Equation of saving , S = Income - consumption .

S = Y - C

Now, savings at equilibrium level of income = 7150 - 6700 = 450

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