(Advanced analysis)In a private closed economy, (a)the marginal propensity to save is 0.25, (b)consumption equals income at $120 billion,and (c)the level of investment is $40 billion.What is the equilibrium level of income?
A) $280 billion.
B) $320 billion.
C) $262 billion.
D) $198 billion.

Question

Quizplus · Accepted Answer

The equilibrium level of income is the level of income at which the total amount of saving equals the total amount of investment. In this case, the marginal propensity to save is 0.25, which means that for every additional dollar of income, people will save 25 cents. Consumption equals income at $120 billion, which means that at this level of income, people are not saving or investing any money. The level of investment is $40 billion, which means that this is the amount of money that businesses are investing in the economy. To find the equilibrium level of income, we need to find the level of income at which the total amount of saving equals the total amount of investment. This is the level of income at which the economy is in equilibrium.In this case, the total amount of saving is equal to the marginal propensity to save times the level of income. So, the total amount of saving is 0.25 * Y, where Y is the level of income. The total amount of investment is equal to the level of investment, which is $40 billion. So, the equilibrium level of income is the level of income at which 0.25 * Y = $40 billion. Solving for Y, we get Y = $160 billion.

(Advanced Analysis)In a Private Closed Economy, (A)the Marginal Propensity to Save