Assuming there is no foreign trade in the economy, equilibrium is achieved when government purchases equal

Question

Quizplus · Accepted Answer

In a closed economy with no foreign trade, equilibrium occurs when total output (Y) equals total expenditure (E). E is composed of consumption (C), investment (I), government purchases (G), and net taxes (T). This can be expressed as Y = C + I + G + T. Rearranging this equation to solve for equilibrium, we get:
Y - T = C + I + G
Since Y = C + S + T (Savings are equal to investment when in equilibrium), we can substitute the expression for Y into the above equation and get:
C + S + T - T = C + I + G
S + T = I + G
This equation states that savings (S) and net taxes (T) must equal investment (I) and government purchases (G) for equilibrium to occur. Therefore, the correct answer is option B: saving plus net taxes minus investment.

Assuming There Is No Foreign Trade in the Economy, Equilibrium