Equilibrium Condition

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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:

Diagram

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 + bY 

           Y = $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 + Injection

           Y = $100 + 0.4Y + $300
      0.6Y = $400
           Y = $433m

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