Answer to Question #200967 in Economics for Rodrick Phiri

Question

Given: 𝑌 = 𝐶+𝐼,𝐶 = 50+0.8𝑌𝑑,𝑎𝑛𝑑 𝐼0 = 50.

(a) Graph the consumption function.

(b) Graph the aggregate demand function, 𝐶+𝐼0.

(c) Find the equilibrium level of income from the graph.

Answer 1

(a) The consumption function, or Keynesian consumption function, is an economic formula that represents the functional relationship between total consumption and gross national income.

The graph of this function is a line, and it will start from the point (0; 50) crossing the C-axis (y-axis) and will cross the 45-degree line.

(b) The aggregate demand function is a downward-sloping line in the graph with real GDP at x-axis and price level at y-axis.

(c) The equilibrium level of income is Y = C + I = 50 + 0.8Yd + 50 = 100 + 0.8Yd.

Yd = Y - T, so:

Y = 100 + 0.8(Y - T) = 100 + 0.8Y - 0.8T,

0.2Y = 100 - 0.8T,

Y = 500 - 4T, where T is taxes.