Question

In: Economics

The following data for an imaginary economy. MPC = b = 0.8 , autonomous consumption =...

The following data for an imaginary economy.

MPC = b = 0.8 , autonomous consumption = $50 M , Investment = $100 M , Government spending = $80 M, Transfer payments = $40 M, Taxes = $12 M

Using this data calculate:

a. The level of national income

b. The level of Saving

Solutions

Expert Solution

a)

Equilibrium occurs when Y = C + I + G

where, C = Autonomous consumption + b(Y - T + TR) , I = investment = 100M and G = government spending = 80M, T = taxes = 12M and TR = Transfer payment = 40M

=> C = 50M + 0.8(Y - 12M + 40M)

Thus, Y = 50M + 0.8(Y - 12M + 40M) + 100M + 80M

=> 0.2Y = 252.4M

=> Y = 1262M ----------------------------National Income

b)

Saving(S) = -Autonomous consumption + (1 - b)(Y - 12M + 40M)

= -50M + (1 - 0.8)(Y + 28M)

= -50M + (1 - 0.8)(1262M + 28M)

= 208M

Hence, Level of saving = 208M

Rahul Sunny answered 2 years ago
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