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    Question

    Consider an economy described by the following equations:

    C = 100 + 0.6 ∗ (Y − T) (consumption function)

    I = 200 − 1000 ∗ r (investment function)

    G = T = 100 (government purchase and tax)

    where Y is the national income and r is the interest rate.

    Assume r = 10%, What is the equilibrium income?

    A 300 Correct Answer Incorrect Answer
    B 400 Correct Answer Incorrect Answer
    C 500 Correct Answer Incorrect Answer
    D 600 Correct Answer Incorrect Answer
    E 700 Correct Answer Incorrect Answer

    Solution

    The planned expenditure is

    PE=0.6Y+240.

    Equalize the planned expenditure and the actual expenditure we have

    0.6Y+240=Y

    which gives Y*= 600.

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