Question

The ex ante aggregate demand function in the two-sector model is:

Options

• \[AD=\bar{C}+\bar{I}+cY\]

• \[AD=\bar{I}+c(1-Y)\]

• \[AD=\bar{C}+\bar{I}-cY\]

• \[AD=\bar{C}+cY-\bar{I}\]

Answer 1

Ex ante aggregate demand is the vertical sum of the consumption function \[C=\bar{C}+cY\] and the investment function \[I=\overline{I}\]. Therefore \[AD=\bar{C}+\bar{I}+cY\]. Ex ante aggregate supply is AS = Y.