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National income equilibrium

Discuss answers to the following questions:

Consider an economy in which: C=100+0.5Y and I=100 - output is equal to income

a) Find equilibrium income.

b) What is the multiplier for consumption spending for this economy?

c) What is the multiplier for investment spending for this economy?

d) What is the marginal propensity to save?

Solution Preview

a) The formula for income is Y = C+I+G.
There is no G, so this reduces to Y = C+I.
Output is equal to income, so GDP = Y = 100+0.5Y+I
By algebra and substitution,
.5Y = 100+50
Y =300

b) What is the multiplier for consumption spending for this economy?
This is determined by the MPC (marginal propensity to consume) which is the ...

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