In a closed economy with no government sector, the marginal propensity to save is 0.1, investment is £500 million, and autonomous consumption is £200 million. Which of the following statements is TRUE at the equilibrium level of national income? A. Planned savings are £300 million. B. The marginal propensity to consume is higher than the average propensity to consume. C. Consumption expenditure is equal to £6,500 million. D. The gross domestic product is £6,800 million The correct answer is C. Can anyone please explain the calculation?
Hi Bharti The formulae we need are: Y = T + C + S (note T = 0 since no government sector) W = J at equilibrium (which simplifies to I = S since as well as no government there are no exports/imports) The consumption function is given by C = 200 + 0.9Y, and since I = S we have: Y = C + S = 200 + 0.9Y + 500 Thus at equilibrium Y = 7000, and C = 200 + 0.9Y = 6,500. Dave
