A closed economy has the following components: $C = 100 + 0.85 (Y - T)$ , $I = 70$ , $G = 150$ , taxes are $T = 0.2 Y$ , and net exports are zero. What is the equilibrium national income $Y$ (in billions of rupees)?

hard MCQ 3 marks Class 12 · Economics · Determination of Income and Employment

Answer

1000

The correct answer is $1000$ — Step 6: State the equilibrium income: $1000$ billion rupees.

Step-by-step solution

Step 1: Calculate disposable income: $Y - T = Y - 0.2 Y = 0.8 Y$ .
Step 2: Compute consumption: $C = 100 + 0.85 (0.8 Y) = 100 + 0.68 Y$ .
Step 3: Total planned expenditure is $A E = C + I + G = (100 + 0.68 Y) + 70 + 150 = 320 + 0.68 Y$ .
Step 4: Set equilibrium condition $Y = A E$ : $Y = 320 + 0.68 Y$ .
Step 5: Solve for $Y$ : $Y - 0.68 Y = 320; \Rightarrow; 0.32 Y = 320; \Rightarrow; Y = \frac{320}{0.32} = 1000$ .
Step 6: State the equilibrium income: $1000$ billion rupees.

Common mistake: Misapplying the multiplier instead of solving linear equation

Concept tested: Equilibrium income calculation