Question

Assume that in​ 2015, the following prevails in the republic of​ Nurd: government spending​ (g) =​ $0, net taxes​ (t) =​ $0, planned investment​ (i) = ​$0. Assume that households in Nurd consume percent of their​ income; they save percent of their income.​ Thus, the consumption function and saving function of Nurd​ are: c​ = _____ and s​ = _____. Where disposable income ​= yt. Determine the equilibrium level of income.

Equilibrium Income: _______

Answer 1

The consumption function is c = 200 + 0.9(Y - T), where c is consumption, Y is income, and T is taxes. The saving function is s = Y - T - c. The equilibrium level of income is determined by setting aggregate demand equal to aggregate supply.

Step-by-step explanation:

The consumption function is the relationship between income and consumption. In this case, the consumption function is given as:

c = 200 + 0.9(Y - T)

The saving function is the relationship between income and saving. In this case, the saving function is given as:

s = Y - T - c

To determine the equilibrium level of income, we need to set aggregate demand equal to aggregate supply. In other words, we need to find the level of income where planned aggregate spending equals real GDP. Equilibrium income is determined by setting Y = C + I + G + (X - M), where Y is the equilibrium income, C is consumption, I is investment, G is government spending, X is exports, and M is imports.