November 2012 Q31 , IAI

[divyam sankharva]

The question is ,
C=100 8Yd, where Yd is disposable income . Suppose there are no tax and so Y=Yd , investment 50 ,govt expenditure 50 , find savings
solving this i got 100 , but solution is 50 , they have equated investment and savings is there an error?

 

[Whippet1]

I think the solution is wrong too.

The eqbm Y is given by:

Y = C + I + G + X

ie Y = 100 + 0.8Y + 50 + 50

So, Y* = 1000

By definition, all income recieved is either spent on C or withdrawn, so:

Y = C + S + T + M

Here:

C = 100 + 0.8 * 1000 = 900

So, withdrawals must equal 100.

As T = 0 and M isn't mentioned so, we assume it's also 0, so S must equal 100.

Or more simply, in eqbm J = W so (assuming X and M = 0 as they're not mentioned in the question):

50 + 50 + 0 = S + 0 + 0

So, S = 100

 

[divyam sankharva]

Thank you whippet1