Answer to Question #271863 in Financial Math for unknow

Question

𝒀 = 𝑪 + 𝑰𝟎 + 𝑮𝟎

𝑪 = 𝑪𝟎 + 𝒃𝒀𝒅

𝑻 = 𝑻𝟎 + 𝒕𝒀

Determine and comment on the effect of changes in 𝑮𝟎 on 𝒀*, 𝑪*, and 𝑻*.

Answer 1

if GO (government expenditure) increases , the national income $Y$ (the national income) increases.This reduces savings in the economy thereby increasing interests rates.On other hand a decreased government expenditure would lead to a decreased national income and as a result there is an increase in savings and a reduced interest rates in the economy.

$C$ (consumption in the economy) increases as a result of the rise of the aggregate demand as a result of increased GO (government expenditure) leading to increased productions.A decrese in the government expenditure would reduce the consumption rate due to a decrease in aggregate demand.

An increase in  GO (government expenditure) increases and facilitates more business activies in the economy hence increased generation of tax revenues (T). A decrease in the government expenditure in the economy leads to a decreased tax revenues due to retarded and decreased business activities in the economy.