Question

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.

Answer 1

Answer:

[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