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

  • 2
autonomous consumption = 80
y = 400
C= 80+0.4(400)
 =80+160
 =240
savings=  -80+(1-0.4)400
          = -80+240
          =160
to be at equilibrium savings must be equal to investment. but here I is not equal to S.hence the economy is not at equilibrium.
 
  • 0
What are you looking for?