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Exercises · Q8

Q.Why must the equilibrium level of national income found using the Y=C+I approach always be identical to the equilibrium found using the S=I approach, for the same underlying consumption function and investment figure?

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The two apparent "approaches" to finding equilibrium income are not actually two DIFFERENT economic conditions — they are the SAME single condition, algebraically rearranged.

Starting from the equilibrium condition:

Y=C+IY=C+I

Subtract CC from both sides:

Y−C=IY-C=I

But by the basic income identity, S≡Y−CS\equiv Y-C (saving is, by definition, whatever part of income is not consumed). Substituting this definition directly into the left-hand side above:

S=IS=I

This derivation shows that the S=IS=I condition is obtained from the Y=C+IY=C+I condition purely through simple algebraic rearrangement and the DEFINITION of saving — no new economic assumption has been introduced anywhere in this step. Consequently, ANY value of Y that satisfies Y=C+IY=C+I will, by this exact chain of algebra, automatically also satisfy S=IS=I, and vice versa — the two conditions have EXACTLY the same solution set, which for a single linear equation in Y means exactly the same single equilibrium value. …

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