# How to solve problems on AD-AS?

The trick to solve problems on AD-AS is to remember all the formulas:

S = -c + sY (-c is dissavings, s = MPS, Y = National Income)

C = c + bY (c is autonomous consumption, b = MPC, Y = National Income)

AS = C + S (C is consumption expenditure, S is Savings)

Y = AD = C + I (C is consumption expenditure, I is Investment expenditure)

I = * *Autonomous Investment

APC = C/Y

APS = S/Y

APC + APS = 1

MPC = Change in C/ Change in Y

MPS = Change in S/ Change in Y

MPC + MPS = 1

Let’s learn more about it

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Let’s solve some problems:

### 1. In an economy, S = -100 + 0.6 Y, I = 1100. Calculate equilibrium level of income, savings and consumption expenditure.

Solution. Equilibrium level of income is same as the national income.

In case of equilibrium S = I

-100 + 0.6 Y = 1100

0.6 Y = 1100 + 100

0.6 Y = 1200

Y = 1200/0.6

**Y = 2000**

Now, find S

S = -100 + 0.6 X 2000

S = -100 + 1200

**S = 1100**

Now, find consumption expenditure:

Y = C + I

2000 = C + 1100

**C = 900**

### 2. C = 50 + 0.5 Y, I = 200. Find equilibrium level of national income and consumption expenditure.

Solution. Use Y = C + I

Y = 50 + 0.5 Y + 200

Y – 0.5 Y = 250

0.5 Y = 250

Y = 250/0.5

**Y = 500**

Now, find C

C = 50 + 0.5 x 500

**C = 300**

### 3. An economy is in equilibrium. Calculate MPS, if: Y = 10000, Autonomous Consumption = 500 and C = 8000.

Solution. Use Consumption expenditure equation:

C = c + b Y

8000 = 500 + b (10000)

7500 = b x 10000

7500/10000 = b

b = MPC = 0.75

We know, MPC + MPS = 1

0.75 + MPS = 1

MPS = 1 – 0.75

**MPS = 0.25**

### 4. An economy is in equilibrium. Calculate autonomous consumption, if Income = 10000, MPS = 0.2 & Investment = 1500.

Solution. Since economy is in equilibrium: S = I

S = I = 1500

Use savings equation:

S = -c + s Y

1500 = -c + 0.2 x 10000

1500 = -c + 2000

1500 – 2000 = -c

-500 = -c

**c = 500 which is the autonomous consumption.**

## Test Yourself

- In an economy, the equilibrium level of income is 900 and the dissavings is -100. If MPS = 0.3, consumption expenditure in this economy will be 500? True or False.
- If in an economy, C = 100 + 0.75 Y and I = 150. Estimate equilibrium level of income and consumption expenditure and savings.

Thank You for reading.

You can read the related post on macroeconomics:

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

Precautions while calculating the national income

Domestic territory and national residents

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