Answer to Question #60991 in Macroeconomics for Ahmed

Question

2.Assume the following information represents the National Income Model of a hypothetical economy.



Y = C + I + G,C = a + b(Y – T),T = d + tY, I = I0,G = G0

Where a > 0; 0 < b < 1,d > 0; 0 < t < 1,T = Taxes, I = Investment ,G = Government Expenditure

Explain the economic interpretation of the parameters a,b,d and t.
Find the expression of equilibrium income, consumption and taxes

Answer 1

a – autonomous consumption, which is independent on disposable income;
b – slope of the consumption function;
d – constant autonomous lump-sum tax;
t – rate/proportion of income tax.
An expression, which determines income, consumption and taxes at equilibrium:
Y̅ = 1/1-b x (a - bT + I + G)