Question

How to you know when to use the following and not confuse them with eachother.

1. Y= C+I+G

2. AE=C+I+G

3. S+T= G+I

4. Y=C+S+T

5. Yd= C+S

6. Yd= Y-T

Also, with Y=C+I+G and S+T=G+I, you can also solve for Y or check if both sides are the same. How do you know which one to solve/ do at a specific time?

Please explain in simple words also provide examples for each.

Y= income/ output

C= consumption

I= investment

G= covernment purchases

AE= aggregate expenditure

T= (net?) taxes

S= saving

Answer 1

1. Y= C+I+G

This equation is used to measure output or GDP excluding the net exports.

2. AE=C+I+G

This equation is used in the Keynesian model to determine the expediture from consumption, investments and government so as to find the level of output in the economy.

In a closed economy Y= AE so either equation 1 or 2 can be used to find the output in the Keynesian model.

3. S+T=G+I

This is used in the Keynesian model. According to it, savings is equal to investment expenditure and taxes be equal to the government expenditure. It means that the savings and taxes must combine to finance the investment and government expenditure.

We know income is either consumed spent on taxes or saved. Therefore Y=C+S+T. Thus equating this with equation 1 or 2 we get,

(Y=AE=C+I+G)

C+I+G = C+S+T

Eliminating C from both sides we get,

I+G=S+T

4. Y= C+S+T

This equation is used in the Keynesian model. Here Y is the income which is either consumed, saved or paid in taxes.

This equation is used when we are given the savings and taxes.

5. Yd=C+S

Here it means that the amount of income demanded is equal to the amount of consumption expenditure and the amount of savings.

This is used to calculate money demand when consumption and savings are given.

6. Yd=Y-T

Here it means that the amount of money demanded is equal to the disposable income which means a income after deducting taxes. Now this money can be consumed or saved.

This is used when we are given the income or output and the taxes.