TUTORIAL 2

EQUILIBRIUM INCOME IN 2 SECTORS ECONOMY

1.

Total consumption equals to total income at income level RM 20000. If income increases
to RM 60000, consumption also increases to RM 50000.

a)
b)
c)
d)

2.

Find the values of MPC and autonomous consumption.

What is APS and APC at income level RM 20000?
If planned investment is RM 10000, calculate the level of equilibrium income.
Based on question ( c ), national income have to be increased by RM 25000, how
much the investment should be added to achieve that income level?

Refer to the diagram below and answer the following questions:

S,I
S= -100 + 0.4 Y
Z

1000

V
a) State the consumption function.
b) Calculate the value of:
i)
V
ii)
W
iii)
Z
c) What is the value of APC and APS at income level W?
d) If investment increased by RM 200 million, what is the new equilibrium income?

3.

Given the following consumption schedule:

Income (Y)
0
100
200
300
400
500

Consumption (C)
100
180
260
340
420
500

a) Calculate the APC and APS at each level of income.

b) Find the values of:

i)

MPC
1

ii)
iii)

Autonomous consumption
Level of break-even income.

c) Write the consumption function in terms of C = a + bY and saving function in terms of

S = - a + ( 1-b)Y.
d) If planned investment is RM 150 million, what is the equilibrium income level?
e) If planned investment increased by RM 25 million, what is the new equilibrium
income level?

4.

The following diagram shoes the saving and investment functions in an economy.
Saving, Investment
S= -400 + 0.3Y

I=250
0
Y0

Yf

Ye

a) How much is Ye?

b) Does the economy experience the problem of inflation or unemployment at
equilibrium? Why?
c) Calculate the investment multiplier. If Yf=RM2000, how much should investment
change to achieve Yf? Use the multiplier concept.
d) Briefly explain two factors that can shift the investment curve upward.

5.

The following table contains data of a 3 sector economy. (All figures are in RM Million)
Income (Y)
500
550

Consumption ( C )
450
490

Saving ( S )
50
60

Investment ( I )
100
100

a) What is the value of marginal propensity to consume (MPC) in this economy? What is
the value of average propensity to save (APS) at income level of RM 500 millions?
b) Calculate the value of autonomous consumption.
c) Derive the saving function for this economy.
d) Calculate the national income equilibrium using withdrawal and injection approach.
e) Using investment multiplier principle, calculate the new equilibrium income when
investment increases by RM150 million.

6.

The diagram below shows the equilibrium income level using AD=AS approach.

C,I

AD = AS
C+I
C = 100 + 0.75Y
d
a

1800

a) At the equilibrium level of income, Y, calculate APC.

b) Determine the values of a, d and Y.
c) If autonomous consumption spending changes to RM 150 million, what is the
new income?
d) Based on question ( c ), derive a saving function and draw a diagram.
7.

The diagram below shows the relationship between Y, C and I.

C,I
AD=AS

C+I
C
1500
100
0
a)
b)
c)
d)
e)

500

1750

What is the value of MPC and MPS.

Find the value of multiplier.
How much investment should be needed to achieve the income level RM
1750 million.
What is the value of total consumption at equilibrium income level.
How much is saving at equilibrium income level.

8.

Answer the following questions based on the table given below (figures are in RM
Million).
National
income
4000
6000
8000
10000
12000

consumption

saving

investment

3300
4800
i
ii
9300

iii
1200
1700
2200
iv

1700
1700
1700
1700
1700

Aggregate
demand
5000
v
vi
9500
11000

a) Determine the values of ( i ) to (vi).

b) Determine:
i)
MPC
ii)
Autonomous consumption
c) At income level RM10,000 million, calculate the average propensity to consume
(APC) and average propensity to save (APS).
d) Suppose investment increases by RM50 million, calculate the new level of
equilibrium income in this economy.
9.

The graph below shows the equilibrium level of national income for a two sector
economy.
Saving, Investment
S= -150 + 0.4Y

Investment

Y1

1000

National income

a) Derive the consumption function equation and find the value of autonomous
consumption.
b) Calculate the value of Y1.
c) Calculate the value of investment.
d) Calculate the value of APC and APS respectively at the national income level of
RM1000 million.
e) If the income level had to increase to RM1500 million, how much investment
level should be added to achieve that income level?