A2 Economics: Two ways of calculating the equilibrium level of income
Went through an A2 multiple-choice question on calculating the equilibrium level of income with my A2 class. There are two ways that it can be worked out. Here is the question:
In a closed economy with no government C = 30 + 0.8 Y and I = 50, where C is consumption, Y is income and I is investment.
What is the equilibrium level of income?
A 64 B 80 C 250 D 400
Below is the most common way of working the question out:
Y = C + I
Y = 30 + 0.8Y + 50
0.2Y = 80
Y = 400
Here is the other way that you should be able to work out the equilibrium
Remember: Savings = Income – Consumption
S = Y – C
S = Y – (a + cY)
S = Y – a – cY
S = -a + (1-c) Y
So if we put the figures into the equation you get:
50 = -30 + (1-0.8) Y
50 = -30 + 0.2Y
80 = 0.2Y
Y = 400
