Question

Given the following consumption function
C=70+0.85Y
i)find the corresponding savings​ function
ii) What is the corresponding marginal propensity to save
b) Consider the following national income model for an economy with no external trade.
Y=C+I+G
C=120+0.8Y
I=70
G=40
find
i) equilibrium income
ii) equilibrium consumption
C)An economy has the following import and exp functions
m=20+0.2y
x=70
m=imports,x=exports
find
i) The levels of income at which the economy enjoys trade balance
ii) Show your solution diagrammatically

Answer 1

a.

(i) To calculate the saving function from the consumption function, we just need to subtract the consumption from income.

Saving (S) = Income (Y) - Consumption (C)

So, S = Y - (70 + 0.85Y)

S = 0.15Y - 70

So, the corresponding savings function is S = 0.15Y - 70.

(ii) Marginal propensity to save (MPS) can be determined by differentiating saving function with respect to Y.

MPS = dS / dY = 0.15.

So, the corresponding marginal propensity to save is 0.15.

(b)

(i) The equilibrium income can be determined from Y = C + I + G

So, Y = 120 + 0.8Y + 70 + 40

0.2Y = 230

Y = 1150.

So, the equilibrium income is 1150.

(ii) The equilibrium consumption is C = 120 + (0.8 * 1150) = 1040.

So, the equilibrium consumption is 1040.

(C)

(i) The economy can enjoy the trade balance when export equals import.

So, here, in order to find the income level where trade balances, we need to equate m and x.

20 + 0.2y = 70

0.2y = 50

y = 250.

So, The levels of income at which the economy enjoys trade balance are 250.

(ii)