Equilibrium Level Of Inceome Sample Assignment

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Equilibrium Level Of Inceome Sample Assignment

Suppose, consumption function is given as:
                                   
                                       C = -600 + 0.75Y

Investment is assumed to be 900, regardless of the level of income. Government purchases are 1,200. Determine the equilibrium level of income.

Solution:

 Equilibrium level of income is defined as:
                                        Y = C + I +G
Putting the values, we get
                                        Y = -600 +0.75Y + 900 + 1,200   
                                        Y = 1,500 + 0.75Y
To solve this equation for Y, first subtract 0.75Y from both sided to get
                                     0.25 = 1,500
Then divide both side by 0.25 to obtain the answer
                                         Y = 6,000

                                 

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