**This question was originally posted in our Economics Forums and reposted here.**

I’m trying to work out the national economy of a fictitious country.

Government expenditure = 200

Investment Expenditure = 100

Household Expenditure is described by the consumption function C = 140 + 0.6(Y-T) where Y is national income and T is total taxes. T = tY and t the tax rate is 0.25

Exports = 120

Imports = 120

I’m struggling to work it out particularly the consumption function element.

Can anyone help!

Thanks

### Like this:

Like Loading...

Let’s use a basic GDP goods market equilibrium function.

Y = C + I + G + NX Where Y is GDP

Y = (140+0.6(Y-tY) + 100 + 200 + 0

C = (140+.6(Y-tY)

C = 140 + .6Y – .15Y

C = 140 + .45Y

Back into function: Y = (140+ .45Y + 100 + 200 + 0) —–> Y = .45Y + 440 —–> 1Y – .45 Y = 440

.55Y = 440 —-> Y = 800

Now my math may be wrong ðŸ˜› You can also get a neat aggregate demand function by changing the consumption function to this:

C = (140 + .6 (1-t)Y)