Answer to Question #93804 in Macroeconomics for Arvin A.

Question

Given the following macroeconomic model.

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



What is the economic interpretation of the parameter "g"?

What parameter restrictions are necessary for a solution to exist?

Answer 1

economic meaning of g:

government spending occupies a certain share in GDP. since 0 <g <1 - it becomes clear that government spending is part of the GDP (since the factor g is positive and less than 1).

parameter restrictions that are necessary for a solution to exist

For the classical model, the basic equation is the basic monetary identity of the form:

M x V = P x Y

where: M x V - total costs of customers,

P x Y - total income of sellers.

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