View the step-by-step solution to:

Consumption function C = 95 + .75Yd Taxes T = 50 Investment function I = 60 Disposable income Yd = Y - T Government spending G = 85 Exports EX = 20...

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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