Consumption function C = 95 + .75Yd

Taxes T = 50

Investment function I = 60

Disposable income Yd = Y – T

Government spending G = 85

Exports EX = 20

Imports IM = .05(Yd)

Equilibrium Income (in the aggregate):

Y = C + I + G + EX - IM

All right, so now our equilibrium equation looks like this (all I'm doing is putting values where they go):

Y = 95 + .75(Yd) + 60 + 85 + 20 - .05(Yd)

We know that Yd = Y-T, and that T=50 (from the information given in the problem). Put that in:

Y = 95 + .75(Y-50) + 60 + 85 + 20 - .05(Y-50)

Some calculations to get rid of the parenthesis (.75 x 50 and .05 x 50):

Y = 100 + .75Y- 37.5 + 60 + 85 + 20 - .05Y + 2.5

Basic adding and subtracting:

Y = 230 + .70Y

Subtract .70Y to get our Y on the left side:

.3Y = 230

Divide by .3:

Y = 766.67

So equilibrium income is equal to $766.67 billion.

While it doesn't address all of the parts of the question, this should help you get started with Week 5, discussion question 2!

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