CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Equilibrium Condition - Notes
Equilibrium condition
The economy will be stable where national income (Y) shows no tendency to change through time = Equilibrium
This is when planned expenditure (ie demand) equals national income (ie supply).
Therefore, where:
Exam Style question
Autonomous consumer spending = $100m
Marginal propensity to consume (MPC) = 0.4
Required:
Using the Formula C = a + bY for consumer spending and E = Y for equilibrium, calculate the equilibrium level of national income.
Solution
Y = E at equilibrium
So, National Income (Y) = Consumer spending (C)
Y = C (which is a + bY)
So Y = a + bYY = $100 + 0.4Y
0.6Y = $100
Y = $167m
Now don't forget C + Injections - Withdrawals = Y
Exam Style question
Autonomous consumer spending = $100m
Marginal propensity to consume = 0.4
Injections = $300m
Required:
Using the Formula C = a + bY for consumer spending and E = Y for equilibrium, calculate the equilibrium level of national income.
Solution
Y = E at equilibrium
So, National Income (Y) = Consumer spending (C) + Injections
Y = C (which is a + bY)
So Y = a + bY + InjectionY = $100 + 0.4Y + $300
0.6Y = $400
Y = $433m