In an economy the autonomous investment is Rs 100 and the consumption is C = Rs 80 + 0.4Y. Is the economy in equilibrium at an income level Rs 400? Justify your answer. Can we use the S = I approach to justify the same, i.e. by computing planned savings and comparing it with planned investment?
no, because saving is not equal to investnent when income is 400 and investment is 100 as
c = ? + MPC(y)
i.e c = 80 + 0.4y
s= -? + (1- mpc )y
s = -80 + ( 1- 0.4 )y
s = -80 + 0.6*400
s = -80 + 240
s = 160
which is not equal to I i.e 100
therefore not in equilibrium
c = ? + MPC(y)
i.e c = 80 + 0.4y
s= -? + (1- mpc )y
s = -80 + ( 1- 0.4 )y
s = -80 + 0.6*400
s = -80 + 240
s = 160
which is not equal to I i.e 100
therefore not in equilibrium