SA=−20 + 0.4Y
Ig = 25 − 3i
(Advanced analysis) The equations refer to a private closed economy, where S is saving, Ig is gross
Investment, i is the real interest rate, and Y is GDP. In equilibrium, the level of consumption will be
A) $80.
B) $95.
C) $65.
D) $70.

Question

SA=−20 + 0.4Y 
Ig = 25 − 3i
(Advanced analysis) The equations refer to a private closed economy, where S is saving, Ig is gross
Investment, i is the real interest rate, and Y is GDP. In equilibrium, the level of consumption will be
A) $80.
B) $95.
C) $65.
D) $70.

Quizplus · Accepted Answer

In equilibrium, Y = C + S + Ig. Assuming equilibrium occurs where S = SA, we can substitute the given equation for SA to get S = -20 + 0.4Y. Also, assuming equilibrium occurs where S = C, we can substitute C for S to get C = -20 + 0.4Y. Finally, substituting the given equation for Ig, we get Y = C + (-20 + 0.4Y) + (25 - 3i). Rearranging this equation, we get C = Y - 5 - 3i. To find equilibrium consumption, we set C = -20 + 0.4Y equal to C = Y - 5 - 3i and solve for Y, which gives us Y = 325/7. Substituting this value of Y into either equation for C gives us C = $65. Therefore, the correct answer is C.