Answer to Question #202065 in Macroeconomics for Chaudhry

Question

Consider an economy having following values of Consumption, Investment, Government

 

Spending, and Taxes, 

 

C = 300 + 0.7Y_d         I = 200 – 200i G = 600          T = 100   

 

Derive the aggregate demand equation. Also, calculate the output in an economy.  

Answer 1

Aggregate demand shows the total demand for domestically produced goods and services by domestic residents and foreigners. It is the sum of consumption expenditure, investment expenditure and government expenditure.

$AD = C+ I + G$

$= 300 + 0.7Yd + 200 - 200i + 600 \\ = 1100 + 0.7(Y -T) - 200i \\ = 1100 + 0.7Y - 0.7(100) -200i \\ = 1100 + 0.7Y -70 -200i \\ = 1030 + 0.7Y - 200i \\$

 

The market is in equilibrium when real output is equal to the aggregate demand. Real output is the market value of final goods and services produced in the economy. 

 $Y = AD \\ Y = 1030 + 0.7Y - 200i \\ Y - 0.7Y = 1030 -200i \\ 0.3Y = 1030 -200i \\ Y = 3433.3 -666.7i \\$