Solution From the National income Accounting, we have.
Y=C+I+G+NXTherefore,Y=C0+G(Y−T)+IO+GO+0
Introduce T, to the equation, we get
Y=Co+IO+G(Y−(bo+b1Y))=(Co+Io+Go)+G(Y−bo−b1Y)Let,Co+Io+Go=A,
Where A will be the autonomous expenditure, which does not depend on Y
∴ Y=A+GY−Gbo−Gb1Y⟹ Y−GY+Gb1Y=A−Gb0⟹ Y(1−G+Gb1)=A−Gbo⟹ Y=1−G+Gb1A−GbO=Y∗(Is the Equilibrium Output)
C=Co+G(Y∗−T)=Co+G(Y−(bo+b1Y))C=Co+G(Y−bo−b1Y∗)=Co+GY−Gbo−Gb1Y∗=Co−Gbo+Y∗(G−Gb1)=(1−G+Gb1)(Co−Gbo)(1−G+Gb1)+(A−Gbo)(G−Gb1)=C=(1−G+Gb1)Co(1−G+Gb1)+G(A(1−b1)−bo is the equilibrium consumption.
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