Answer to Question #93803 in Macroeconomics for Arvin A.

Question

Consider a simple Keynesian model in linear parametric form based on the following models:

i) Y = C + I0 + G0 Equilibrium Income (Y)

C = a + b(Y − T) Consumption with Taxes (T), where: a > 0, 0 < b < 1

T = d + tY Tax function, where: d > 0, 0 < t < 1

Note: I0 = exogenous income, G0 = exogenous govt. spending

ii) Y = C + I0 + G0 Equilibrium Income (Y)

C = a + b(Y – T0) Consumption with Taxes (T), where: a > 0, 0 < b < 1

G = gY Government Spending function, where 0 < g < 1



were taxes and government spending are both endogenous. Assume that a balanced budget is not necessary.

a) Solve for Y*.

b) Discuss the effect (increase or decrease) of an increase in the parameter "g" on Y*.

Answer 1

1.Equilibrium income (Y) is the endogenous variable to be determined.

The autonomous components of expenditure, I and G, as also T are exogenous variables determined by factors outside the model.

Y̅ = 1/1-b x (a-bT + I + G)

2.If G increase, Y increase too.

http://www3.wabash.edu/econapp/econ75/chapters/chap16/c16read.pdf

http://www.economicsdiscussion.net/income/income-distribution/equilibrium-income-determination-and-changes-with-diagram/15554