Question

Given the following information about an open economy with government draw the AD function and find the equilibrium level of income?
C=100+0.7YD, I=200, G =150, t=A0.2, X=100, Z=0.2

Answer 1

let A=2 than

$Y=C+I+G+(X-Z)$

$Y=100+0.7Yd+200+150+(100-0.2)$

$Y=549.8+0.7Yd$

Yd=Y-T

$t = A0,2=2\times0.2=0.4$

$Y=549.8+0.7(Y-0.4)=549.52+0.7Y$

$Y-0.7Y=549.52$

Y=1871.33

AD=C+I

C = 100 + 0.7YD

I = 200

AD=100 + 0.7YD+200=300+0.7YD

AD=300+0.7YD