Question

Given the following equations
S=-70+0.25 Yd
Yd=Y-T
I= I o=40
G=G o=30
T=T o=20
Find out the equilibrium level of income

EEC 11 2019-20 ECONOMICS​

Answer 1

Answer:

Equilibrium level of income = Rs.580

Explanation:

Given:

S=-70+0.25 Yd

Yd=Y-T

I= I o=40

G=G o=30

T=T o=20

To find:

Equilibrium level of income

Solution:

Now, we have been given that Yd = Y - T

We substitute the same in the equation for S to get the following:

S = -70+0.25(Y-T)

Since we have value of tax so we will put it in the above equation

S = -70+0.25(Y-20)

Therefore, S => -70+0.25Y-5 = -75+0.25Y

Now we know that savings and consumption together form income, that is:

C (Consumption) + S (Saving) =Y (Income)

Therefore, we substitute in this equation to get:

C+ (‐75+0.25Y) = Y

C = 75-0.25Y+Y

C = 75+0.75Y

Now, we know that Aggregate Demand (AD) is the addition of total consumption, investment and government expenditure, that is:

AD= C+I+G

Therefore, AD => 75+0.75Y+40+30 = 145+0.75Y

As we know that at equilibrium Income (Y) = Aggregate Demand (AD)

Therefore, Y = 145 + 0.75Y

=> Y- 0.75Y = 145

=> 0.25Y = 145

Therefore, Y => 145/0.25 = 580

Thus, equilibrium level of income is Rs.580

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