**This question was originally posted in our Economics Forums and reposted here.**
I’m trying to work out the national economy of a fictitious country.
Government expenditure = 200
Investment Expenditure = 100
Household Expenditure is described by the consumption function C = 140 + 0.6(Y-T) where Y is national income and T is total taxes. T = tY and t the tax rate is 0.25
Exports = 120
Imports = 120
I’m struggling to work it out particularly the consumption function element.
Can anyone help!
Let’s use a basic GDP goods market equilibrium function.
Y = C + I + G + NX Where Y is GDP
Y = (140+0.6(Y-tY) + 100 + 200 + 0
C = (140+.6(Y-tY)
C = 140 + .6Y – .15Y
C = 140 + .45Y
Back into function: Y = (140+ .45Y + 100 + 200 + 0) —–> Y = .45Y + 440 —–> 1Y – .45 Y = 440
.55Y = 440 —-> Y = 800
Now my math may be wrong 😛 You can also get a neat aggregate demand function by changing the consumption function to this:
C = (140 + .6 (1-t)Y)