Question

Suppose a closed economy has an aggregate consumption function given by C=200 +0.50Yd and generates $2200 output and income in equilibrium. Suppose also that the government collects a lump-sum tax of 400 .

How much will the private sector be saving total in equilibrium?

Answer 1

In an economy, the private sector's saving, also known as national saving, is equal to the difference between national income (Y) and consumption (C) in equilibrium. The equation for consumption is C = 200 + 0.50Yd. To find the value of private sector saving, we subtract C (consumption), investment (I), government spending (G), and net exports (X - M) from Y.

Step-by-step explanation:

In an economy, the private sector's saving, also known as national saving, is equal to the difference between national income (Y) and consumption (C) in equilibrium. The equation for consumption is given as C = 200 + 0.50Yd, where Yd represents disposable income. Since the question does not provide information on the disposable income, we need to calculate it using the tax (T) value given. The tax is mentioned as a lump-sum tax of $400, so Yd = Y - T = Y - 400.

Substituting the given values, we can find the value of Y. Y = $2200 (output and income in equilibrium).

Y = C + I + G + (X - M). To find the value of private sector saving, we subtract C (consumption), I (investment), G (government spending), and (X - M) (net exports) from Y:

Saving = Y - C - I - G - (X - M)

Substituting the given values:

Saving = $2200 - (200 + 0.50(Y - 400)) - 300 - 200 - (500 - 0.1(Y - 400))

Simplifying the equation, we can find the value of private sector saving.