What are the short-run equilibrium values of Y, r, Y - T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I.

Question

Frank

Business

18 December, 19:44

What are the short-run equilibrium values of Y, r, Y - T, C, I, private saving, public saving, and national saving? Check by ensuring that C + I + G = Y and national saving equals I.

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Answers (1)

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Beltran · Answer 1

[AD = C + I + G] = [AS = Y]

S = I

Explanation:

Economy is at equilibrium when : Aggregate Demand = Aggregate Supply

Aggregate Demand [AD] is the total value of goods & services, all sectors of an economy are planning to buy, during a period of time.

Assuming 3 sector Economy having : Households, Firms, Government

AD = Consumption (C) + Investment (I) + Net Govt. Expenditure (NG = G-T)

Aggregate Supply [AS] is the total value of goods & services, all producers of economy are planning to sell, during a period of time. Total value of goods & services is distributed among all production factors as factor incomes. And, Income is either saved or consumed.

AS = National Income [ Y ] = Consumption (C) + Saving (S)

So, Equilibrium : [AD = C + I + NG] = [ AS = Y] → ∴ C + I + NG = Y

[AD = C + I + NG] = [ AS = C + S] → ∴ C + I + NG = C + S

Assuming : leakage (tax) = injection (govt expenditure); NG = G-T = 0

So, C + I = C + S → ∴ I = S