Question

The following information represents the National Income Model of an 'Utopian' economy


Y = C+I+G

C= a+b(Y-T)

T= d+tY

I=Io

G=Go


where a>O; O<b<1

d>O; O<t<1


T=Taxes

I=Investment

G=Government Expenditure


i) Explain the economic interpretation of the parameters a,b,d and t

ii) Find the equilibrium values of 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).