Question

In a model with no government or foreign sector, if autonomous

consumption is Co = 80, investment is Io = 70, and the marginal
propensity to save is s = 0.25, equilibrium income is
a. 600
b. 225
c. 150
d. 200
e. 750

Answer 1

The equilibrium income in a simple economic model with no government or foreign sector, given an autonomous consumption of 80, investment of 70, and marginal propensity to save of 0.25, can be found by using the formula Y = (Co + Io) / s, which gives an equilibrium income of 600.

Step-by-step explanation:

The student is asking about the equilibrium income in a simple economic model where the only components are autonomous consumption, investment, and saving. With the given information (autonomous consumption Co = 80, investment Io = 70, and marginal propensity to save s = 0.25), we can calculate the equilibrium income using the formula for equilibrium in a closed economy without government: Y = Co + Io + (1 - s)Y, where Y represents national income.

First, solve for Y by isolating it on one side of the equation:

1. Y = Co + Io + (1 - s)Y
2. Y - (1 - s)Y = Co + Io
3. Y(1 - (1 - s)) = Co + Io
4. Y(s) = Co + Io
5. Y = (Co + Io) / s

Substituting the given values:

1. Y = (80 + 70) / 0.25
2. Y = 150 / 0.25
3. Y = 600

Therefore, the equilibrium income is 600, corresponding to option a.