Question

Given the consumption function \[C = 40 + 0.8Y\] and autonomous investment \[\overline{I} = 10\], the equilibrium level of income is:

Options

• 200

• 300

• 250

• 50

Answer 1

Equilibrium requires \[Y = C + \overline{I}\]. Substituting: \[Y = 40 + 0.8Y + 10 \Rightarrow 0.2Y = 50 \Rightarrow Y = 250\]. Hence the initial equilibrium income is 250.