Answer to Question #184701 in Macroeconomics for SPENCER GYABENG

Question

Y = C + I + G

C = a + b(Y - T)

G = gY

a. Find the equilibrium national income(Y)

b. what further restriction on the parameter is needed for solution to exist

Answer 1

Solution:

a.). The equilibrium national income (Y) = C + I + G

Y = a + b(Y – T) + I_o +  gY

Y = $\frac{I_{o} + a - bT }{1 -b - g}$

 

b.). Further restriction on the parameter needed for the solution to exist.

For the solution to exist, it must be that (b+g) < 1, otherwise, Y; C; and G will be negative, which is impossible. Therefore, 0 < (1 – b – g) < 1