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JAMB Economics 2015 Paper

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Question : 26

Total: 70

The following equations relate to an open economy with a government sector. E = aggregate expenditure on domestically produced goods, C = Consumption, I = Investment, G = Government expenditure, T = taxes, M = imports, X = Exports. Which equation is correct

E = C + I + G
E = C + I + G + M – X
E = C + I + G + X – M
E = C + I + G – T + M – X

Solution:

Concept:

In an open economy with government, aggregate expenditure on domestic goods includes domestic spending plus net exports.

Explanation:

Domestic demand equals consumption

C

, investment

I

, and government spending

G

.

Exports

X

add to expenditure on domestically produced goods because they are sold abroad.

Imports

M

reduce expenditure on domestic goods because part of domestic spending goes to foreign products.

Therefore, aggregate expenditure is given by:

E = C + I + G + X - M

So the correct equation is option C.

Answer:

E = C + I + G + X - M

Option C.

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