In an economy, autonomous consumption is 500, marginal propensity to save is 0.2
In an economy, autonomous consumption is 500, marginal propensity to save is 0.2 and investment expenditure is 2,000. Calculate its equilibrium level of income.
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MPS = 0.2, so MPC = 0.8
C = 500 + 0.8Y
Y = C + I, 500 + 0.8Y + 2,000
=> 0.2Y = 2,500
∴ Y = 12,500
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