In a private closed economy (a) the marginal propensity to save is 0.25, (b) consumption equals income when consumption is $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 saving equals investment. In this case, the marginal propensity to save is 0.25, which means that for every additional dollar of income, 25 cents is saved. Consumption equals income when consumption is $120 billion, which means that the equilibrium level of income is $120 billion / (1 - 0.25) = $160 billion. However, we are also given that the level of investment is $40 billion, so the equilibrium level of income is actually $160 billion + $40 billion = $200 billion.

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