Question

What would be the equilibrium of open economy?

• A. \( Y = C + I \)
• B. \( Y = C + I + G \)
• C. \( Y = C + I + G + X - M \)
• D. None of these

Hint:

The equilibrium in an open economy includes exports and imports, making the equation \( Y = C + I + G + X - M \) necessary to capture the full scope of economic activity.

Answer 1

The Correct Option is C

Step 1: Understanding open economy equilibrium.
In an open economy, equilibrium is achieved when the total production \( Y \) is equal to the total expenditure. Total expenditure consists of consumption (\( C \)), investment (\( I \)), government spending (\( G \)), exports (\( X \)), and imports (\( M \)). Therefore, the equilibrium equation for an open economy is \( Y = C + I + G + X - M \).

Step 2: Analyzing the options.
(A) \( Y = C + I \): This is incorrect because it does not account for government spending, exports, and imports.
(B) \( Y = C + I + G \): This is incorrect as it does not account for the trade balance (exports and imports).
(C) \( Y = C + I + G + X - M \): Correct. This is the correct equilibrium equation for an open economy, as it accounts for all components of expenditure.
(D) None of these: This is incorrect because the correct answer is (C).

Step 3: Conclusion.
The equilibrium of an open economy is \( Y = C + I + G + X - M \). Therefore, the correct answer is (C) \( Y = C + I + G + X - M \).