Question #51414

If: Y = C + I where C = 120 + 0.8Y, I = 200 + 0.05i and Y = 1400,
Q1. Compute the equilibrium national income, consumption and investments
Q2. What is the size of government expenditure multiplier and savings ?

Expert's answer

Q1.

Y = C + I = 120 + 0.8Y + 200 + 0.05i = 320 + 0.8Y+ 0.05i

0.2Y = 320+ 0.05i

280 – 320 = 0.05i

i = -800

I = 200 + 0.05i = 200 – 40 = 360

C = 120 + 0.8Y = 120 + 1120 = 1240

Y = C + I = 1400

Q2.

government expenditure multiplier = 1 / (1-MPC)

MPC is the marginal propensity to consume

government expenditure multiplier = 1 / (1-0.8) = 5

We have the consumption function in the form C = a + MPC (Y) that

autonomous consumption is a. The savings function is S = -a + (1 –

MPS) (Y)

So, the saving function is:

S = -120 + 0.2 Y

S = -120 + 280 = 160

Y = C + I = 120 + 0.8Y + 200 + 0.05i = 320 + 0.8Y+ 0.05i

0.2Y = 320+ 0.05i

280 – 320 = 0.05i

i = -800

I = 200 + 0.05i = 200 – 40 = 360

C = 120 + 0.8Y = 120 + 1120 = 1240

Y = C + I = 1400

Q2.

government expenditure multiplier = 1 / (1-MPC)

MPC is the marginal propensity to consume

government expenditure multiplier = 1 / (1-0.8) = 5

We have the consumption function in the form C = a + MPC (Y) that

autonomous consumption is a. The savings function is S = -a + (1 –

MPS) (Y)

So, the saving function is:

S = -120 + 0.2 Y

S = -120 + 280 = 160

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