Question

Aggregate demand (AD) in an economy with government taxes and transfers is expressed as:

Options

• \[AD=\overline{C}+c(Y-T+\overline{TR})-I+G\]

• \[AD=\overline{C}+c(Y+T-\overline{TR})+I-G\]

• \[AD=\overline{C}+cY_D+I-T+G\]

• \[AD=\overline{C}+c(Y-T+\overline{TR})+I+G\]

Answer 1

Aggregate demand comprises consumption, investment and government spending. Since consumption depends on disposable income, \[AD=\overline{C}+c(Y-T+\overline{TR})+I+G\], where taxes reduce and transfers raise disposable income.