Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the income of equilibrium?
Question
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the income of equilibrium?
Solution
In a closed economy with no government, the equilibrium income is determined where aggregate demand equals aggregate supply. In this case, aggregate demand is the sum of consumption (C) and investment (I).
Given the consumption function C = 100 + 0.6Y and the new investment level I = 300, we can set up the equation for aggregate demand (AD) as follows:
AD = C + I AD = (100 + 0.6Y) + 300
To find the equilibrium income, we set aggregate demand equal to income (Y):
Y = 100 + 0.6Y + 300
Solving this equation for Y gives us the equilibrium income. First, subtract 0.6Y from both sides to get:
0.4Y = 100 + 300
Then, combine like terms:
0.4Y = 400
Finally, divide both sides by 0.4 to solve for Y:
Y = 400 / 0.4 Y = 1000
So, the equilibrium income in this economy is 1000.
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