A Basic Consumption Function Question

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**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!

Thanks

One comment

  1. 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)

    Reply

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