Question

In a simple economy, the savings function is S= - 100 +0.20Y. Investment is equal to 700. In this economy, equilibrium GDP is S| (Round your answer the nearest dollar)

Answer 1

Answer

the saving function is the form of

S=-a+(1-MPC)*Y

and

consumption function is the form of

C=a+MPC*(Y

a=autonomus consumption and MPC=marginal propensity to consume

a=100 and MPC=1-0.2=0.8

the consumption function is

C=100+0.8Y

equilibrium is at

Y=C+I

Y=100+0.8Y+700

Y-0.8Y=800

0.2Y=800

Y=800/0.2

Y=$4000

the equilibrium GDP is $4000