Question

Consider the following information:
Marginal propensity to consume = 0.8
Investment = R150 million
Autonomous consumption = R110 million
The equilibrium level of income is:


R1 300 million.


R260 million.


R325 million.


R2 600 million.


impossible to determine from the information provided

Answer 1

To find the equilibrium level of income, we can use the following formula from the Keynesian expenditure approach:

\[ Y = C + I \]

Where:
- \( Y \) is the equilibrium level of income,
- \( C \) is total consumption, and
- \( I \) is investment.

Consumption \( C \) can be expressed as:

\[ C = C_0 + MPC \times Y \]

Where:
- \( C_0 \) is autonomous consumption (given as R110 million),
- \( MPC \) is the marginal propensity to consume (given as 0.8).

Substituting the known values into the consumption equation, we get:

\[ C = 110 + 0.8Y \]

Now we can substitute the consumption equation into the equilibrium income equation:

\[ Y = (110 + 0.8Y) + 150 \]

Now simplify it:

\[ Y = 260 + 0.8Y \]

Next, isolate \( Y \):

\[ Y - 0.8Y = 260 \]

\[ 0.2Y = 260 \]

\[ Y = \frac{260}{0.2} \]

\[ Y = 1300 \]

So, the equilibrium level of income is **R1,300 million**.