In a closed economy, the consumption, the planned investment, the government spending, and the taxes are given by, respectively, C = 100+ 0

Economics Dec 15, 2020

In a closed economy, the consumption, the planned investment, the government spending, and the taxes are given by, respectively, C = 100+ 0.5 x Yd, I = 250, G = 200, and T = 100 where Ya =Y-T is the disposable income, and Y denotes the real GDP. (i) Write the planned aggregate expenditure (AE) as a function of GDP (Y). (ii) Find the equilibrium GDP.

Expert Solution

1) AE = C + I + G

Now C= 100+0.5Y_d I=250 G=200 T= 100, Y_d= Y-T

So, C= 100+0.5(Y-100)

Put these in the above equation we get;

Answer. AE = C + I + G = 100+0.5(Y-100)+ 250+ 200

2) In equilibrium Y=AE

So, Y=100+0.5(Y-100)+ 250+ 200

Solving we get; Y= 500+ 0.5Y

Answer. So, Y= 500/0.5= 1000

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