Task 2 The model of national economy is charas th fllowing data The model of nat

Question

Task 2 The model of national economy is charas th fllowing data The model of national economy is characterised by the following data Household consumption C-400+0.9 D Gross investment Ig -200 Government spending G-250 Sum of Taxes T- 150 Disposable income DI-Y-T Calculate: Equilibrium level of income Y; Calculate the value of Marginal propensity to consume and value of Marginal propensity to save; Private consumption at macroeconomic equilibrium; Develop equation of saving and calculate amount of saving at the point of equilibrium level of income. a) b) c) d)

Explanation / Answer

C= 400 + 0.9 DI , I =200 , G = 250 , T=150 , DI =Y -T

Aggregate demand (AD) = C + I + G

Now put value of C , I , G and T in AD equation:

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

(a) To find equilibrium level of income , equate Y with AD :

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

Y - 0.9 Y = 850 - 135

0.1 Y = 715

Y = 7150 [ Equilibrium level of income]

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

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

C = 400 + 0.9(7000)

C = 400 + 6300

C = 6700

(d) Saving equation , S = Income - consumption

S = Y - C

Now, at equilibrium level of income , S = 7150 - 6700

S = 450

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