Question

QUESTION 20 Scenario: Income-Expenditure Equilibrium GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. (Scenario: Income-Expenditure Equilibrium) Income-expenditure equilibrium is achieved when GDP is: A) $8,000. B) $7,000. C) $3,500. D) $700.

Answer 1

C).$3500 is the answer

Given Current GDP is $8000

Autonomous consumption is $500

Planned investment spending is $200

Marginal propensity to consume is 0.8

Lets suppose equilibrium GDP is X

Income expenditure equilibrium is said to be achieved when the total income is equal to total consumption and savings

GDP represents the total income of the country. we have to find the GDP at which it will be equal to consumption and savings i.e.,

X= Total consumption/expenditure + Total savings

X=TC+$200 (1)

Marginal propensity to consume indicates the additional dollar a consumer is willing to spend for additional income earned. At GDP equilibrium this can be expressed as follows

Total consumption = Autonomous consumption +MPS(GDP equilibrium)

TC= 500+0.8(X)

By substituting this in (1) We get

X= 500+0.8(X)+200

X-0.8(X)=700

0.2X=700

X=3500

Therefore At GDP of $3500 country is said to be in a equilibrium state.