Refer to the above diagram where I_g is gross investment, X is exports, G is government purchases, S and S_a are saving before and after taxes respectively, M is imports, and T is net taxes, that is, taxes less transfers.The equilibrium level of GDP for this economy is: A)Y₄. B)Y₃. C)Y₂. D)Y₁.

Question

Quizplus · Accepted Answer

At equilibrium, aggregate demand (AD) equals aggregate supply (AS) which is represented by the 45-degree line. The AD curve is the sum of consumption (C), investment (I), government purchases (G), and net exports (NX). In this diagram, AD intersects the 45-degree line at point A which corresponds to the level of GDP where output equals spending. At point A, gross investment (I_g) equals saving after taxes (S_a) plus net taxes (T). Point A corresponds to Y₃. Therefore, the equilibrium level of GDP is Y₃.

Refer to the Above Diagram Where Ig Is Gross Investment

Refer to the Above Diagram Where I_g Is Gross Investment