Equlibrium Level on income question (1 Viewer)

[Nasonex]

What is the equilibrium level of income if C = 100 + 0.8Y and I=40?
Answer = 700

Can someone explain why the answer is 700, with working out plz

Cheers

 

[bling05]

Covert the consumption function into a savings function.

So C = 100 + 0.8Y becomes S = -100 + 0.2Y

You need to know that S = I

So now you solve for Y

40 = -100 + 0.2Y
0.2Y = 140
Y = 700

 

[runnable]

Wow I dun get what you're saying bling....

Can you explain further please?

 

[veloc1ty]

Maybe this explanation will help:

C = 100 + 0.8Y

The 100 is necessary consumption, so savings is 0.2Y - 100.

Equilibrium occurs when S = I.

S = I
0.2Y - 100 = 40
0.2Y = 140
Y = 700

 

[jessi90]

but how do we know savings is 0.2Y - 100?

 

[veloc1ty]

When you get income, you either save it or spend it. As it gives the consumption function as 0.8Y, you know that the rest of the income (i.e. 0.2Y) must have been saved. Further, because there was necessary consumption of 100 units, savings begins at -100 units because the economy has already spent 100 before it started saving.

That's the long-winded way of saying what bling said: "Convert the consumption function into a savings function. So C = 100 + 0.8Y becomes S = -100 + 0.2Y".

 

[runnable]

Hows this.

C=100+0.8Y

Y= C+S

S= Y- (100+0.8Y)
= 0.2Y-100

I=S if equlibrium

0.2Y-100 = 40
0.2Y = 140
Y = 700

 

[seano77]

Why does Y=C+S and why does I=S in equilibrium? And is the result saying that an investment of 40 by the government multipies to an increase of 700 in national income?
EDIT: Also, is the initial 0.8Y figure MPS or MPC?

 

[veloc1ty]

Why does Y=C+S and why does I=S in equilibrium?

Think back to year 11 economics: the circular flow of income.

And is the result saying that an investment of 40 by the government multipies to an increase of 700 in national income?

Take out the word 'government' here.

Also, is the initial 0.8Y figure MPS or MPC?

It says C = 100 + 08Y. C stands for consumption. So it's the consumption function. Don't bother confusing it with APC/MPC/APS/MPS.

 

[runnable]

Simply put in this case:

Income (Y) = Consumption (C) + Savings (S)

But C = 0.8 Y + 100

So S= Y - C
= 0.2Y - 100

But economy will only be in equilibrium if S=I as Demand = Income (Y) and

Demand = C + I

So I=S

0.2Y-100 = 40
Y= 700

I find calling stuff like "consumption function" and "savings function" just makes it more confusing.

 

[magik22]

Hows this.

C=100+0.8Y

Y= C+S

S= Y- (100+0.8Y)
= 0.2Y-100

I=S if equlibrium

0.2Y-100 = 40
0.2Y = 140
Y = 700

This is the best answer. Thx.