Ig = 80
SA=−80 + 0.4Y
(Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S
Is saving, and Y is gross domestic product (GDP). In equilibrium, consumption will be
A) $400.
B) $280.
C) $320.
D) $360.

Question

Ig = 80 
SA=−80 + 0.4Y
(Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S
Is saving, and Y is gross domestic product (GDP). In equilibrium, consumption will be
A) $400.
B) $280.
C) $320.
D) $360.

Quizplus · Accepted Answer

In a closed economy, Y=C+Ig+S 
Substitute Ig=80 and SA=−80+0.4Y into the equation, 
we get Y = C + 80 + (-80 + 0.4Y)
Simplify: Y = C + 0.4Y
0.6Y = C
C = 0.6Y 
Substitute Y = C + Ig + SA into the equation, 
we get Y = C + 80 + (-80 + 0.4Y)
Simplify: Y = C + 0.4Y 
0.6Y = C 
C = 0.6Y = 0.6(320) = $192 
Therefore, the correct answer is C, $320.