Answer to Question #205650 in Macroeconomics for Muskan saifi

Question

Consider a three sector economy where: 

C = 20 + 0.80YD 

I = 50 

G = 20 

T = 10 

(a) Compute equilibrium level of income and show it in a diagram. 

(b) Compute consumption at equilibrium level of income. 

(c) Compute total leakages in an economy at equilibrium level of income.

Answer 1

Solution:

a.). At equilibrium: AE = Y

Y = C + I + G

C = 20 + 0.80YD = 20 + 0.80(Y – T) = 20 + 0.80(Y – 10)

Y = 20 + 0.8(Y – 10) + 50 + 20

Y = 20 + 0.8Y – 8 + 50 + 20

Y – 0.8Y = 20 + 50 + 20 – 8

0.2Y = 82

Y = 410

The equilibrium level of income (Y) = 410

It is displayed in the below diagram:

 

 

b.). Consumption at equilibrium level of income:

C = 20 + 0.80YD = 20 + 0.80(Y – T) = 20 + 0.80(Y – 10)

Y = 410

C = 20 + 0.80(410 – 10)

C = 20 + 328

C = 348

Consumption at equilibrium level of income (C) = 348

 

c.). The total leakages in a three-sector economy = Savings + Taxes

Taxes = 10

Savings = Y – C

Savings = 410 – 348 = 62

The total leakages in the economy at equilibrium level of income = 62 + 10 = 72

The total leakages in the economy at the equilibrium level of income = 72