Question

Which one of the following equations defines the equilibrium of the Three Sector Economy?

• A. \(Y = a + bY + I\)
• B. \(Y = C + I\)
• C. \(Y = C + I + G\)
• D. \(Y = C + I + G + (X - M)\)

Hint:

Simply count the aggregate demand components representing the sectors:
- 2 Sectors \(\rightarrow\) Households (\(C\)) + Firms (\(I\)).
- 3 Sectors \(\rightarrow\) Households (\(C\)) + Firms (\(I\)) + Government (\(G\)).
- 4 Sectors \(\rightarrow\) Households (\(C\)) + Firms (\(I\)) + Government (\(G\)) + Foreign trade (\(X-M\)).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
This question tests macroeconomic models used to determine equilibrium national income under different sector scopes.

Step 3: Detailed Explanation:
In macroeconomics, national income (\(Y\)) is determined by aggregate expenditure, which is divided among different sectors of the economy:
- Two-Sector Economy:
This model consists of only Households and Businesses.
The equilibrium equation is:
\[ Y = C + I \] where:
\(C = \) Consumption Expenditure
\(I = \) Investment Expenditure
- Three-Sector Economy:
This model adds the Government sector to the two-sector model.
The government introduces government spending (\(G\)) and taxes (\(T\)).
The equilibrium equation is:
\[ Y = C + I + G \] where:
\(G = \) Government Expenditure
- Four-Sector Economy (Open Economy):
This model adds the foreign sector (rest of the world), incorporating net exports.
The equilibrium equation is:
\[ Y = C + I + G + (X - M) \] where:
\(X = \) Exports
\(M = \) Imports
Therefore, the equation that defines the equilibrium of a Three-Sector Economy is \(Y = C + I + G\).

Step 4: Final Answer:
The correct equation is \(Y = C + I + G\).
Therefore, the correct choice is Option (C).