Question

Prepare a graphical representation of determination of equilibrium income in a two-sector economy.

Hint:

The equilibrium income occurs where the aggregate demand curve intersects the 45-degree line in a two-sector economy.

Answer 1

Step 1: Explain the Graphical Representation.
In a two-sector economy, the equilibrium income is determined where the aggregate demand curve intersects the 45-degree line (where income equals expenditure).
Step 2: Plot the Consumption and Aggregate Demand Curves.
- The consumption function is given by \( C = 200 + 0.8Y \), which shows the relationship between consumption and income.
- The investment \(I = 300\) is constant and represents the vertical line of the investment.

Step 3: Graphical Illustration.
The intersection of the aggregate demand curve (which is the sum of consumption and investment) with the 45-degree line represents the equilibrium income, which in this case is \(Y = 2500\).