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)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)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 investment I = 200, aggregate demand (AD) is:
AD = C + I AD = (100 + 0.6Y) + 200 AD = 300 + 0.6Y
In equilibrium, aggregate demand equals income (Y), so we can set AD = Y and solve for Y:
300 + 0.6Y = Y 300 = 0.4Y Y = 300 / 0.4 Y = 750
So, the equilibrium income in this economy is 750.
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