Answer to Question #42868 in Macroeconomics for Justin

Question

if total autonomous spending is 800, the marginal propensity to save is 0.2 and the marginal tax rate is 0.25. what is the equilibrium income

Answer 1

We can write the following formula:

Y= C = Ao + c’(Y-T),
where
Y– equilibrium income
(Y-T)– disposable income
c’– propensity to consume
C– consumption

So,
Y= 800 + (1-0.2)*(Y – 0.25Y) = 800 + 0.8*0.75Y = 800 + 0.6Y
0.4Y= 800
Y= 2000