Understanding the Economic Model
This economic model represents a simplified version of an economy, illustrating the relationships between consumption, government spending, investment, taxes, transfer payments, exports, and imports.
Components Explained
- Consumption (C): Given by the equation C = 200 + 0.60Yd
- Here, 200 is the autonomous consumption, and 0.60 represents the marginal propensity to consume out of disposable income (Yd).
- Government Spending (G):
- Fixed at 150, which contributes directly to the aggregate demand.
- Investment (I):
- Set at 240, indicating business spending on capital goods.
- Tax (T):
- Represented as T = 10 + 0.25Y, where 10 is a fixed tax and 0.25Y indicates a proportional tax based on income.
- Transfer Payments:
- Amounting to 50, this injects additional income into the economy, influencing consumption.
- Exports (X):
- Given by X = 30 + 0.2Y, where 30 is the autonomous level of exports and 0.2 is the responsiveness to income.
- Imports (M):
- Fixed at 400, indicating a constant outflow of money from the economy.
Equilibrium Condition
To determine equilibrium, we consider the aggregate demand (AD) and aggregate supply (AS). The equilibrium occurs when AD equals AS, integrating all components:
- AD = C + G + I + X - M
Understanding these interrelations helps in analyzing economic fluctuations and formulating fiscal policies to stimulate growth or control inflation.