
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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