Question #42868

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

Expert's answer

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

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

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