Question

Q#2 Given the nation income model

𝑌 = 𝐶 + 𝐼𝑜 + 𝐺𝑜 + 𝑋0 − 𝑍

𝐶 = 𝐶𝑜 + 𝑏𝑌𝑑

𝑌𝑑 = 𝑌 − 𝑇0

𝑍 = 𝑍0 + 𝑧𝑌

Explain the equilibrium level of income and consumption

Explain the economic meanings of b and z.

List the endogenous and exogenous variables of the model?

Answer 1

(a) Equilibrium level of income and consumption is when aggregate demand (AD) is equal to aggregate supply (AS)

At equilibrium $Y=C+I+G(X-Z)$

Therefore $Y=C_0+b(Y-T_0)+I_0+G_0+X_0-Z_0-zY$

This gives an equilibrium consumption of

$C=C_0+bYd$

$C=C_0+b(Y-T_0)$

(b)b=marginal propensity to consume

z=marginal propensity to save

(c)The exogenous variables are $I_0, \;G_0, \; X_0, \; T_0, \; Z_0 ,\; C_0$

The endogenous variables are $Y, C,T$