Consider a simple macroeconomic model similar. Consumption is a function of disposable income such that:

Y = C + I + G

C = a + b(Y − T)

a > 0

0 < b < 1

Y= National income; T = Tax level; G equals government spending; I = Investment; a = autonomous consumption; b = marginal propensity to consume. All other definitions and conditions are the same.

(a) Find the new equilibrium level of Y in terms of our parameters.

(b) Evaluate the difference between the two equilibria. Is there anything we can say definitively about their relative values or behavior?

(c) According to this simple model, what effect would an increase in G matched by an equal increase in T have on equilibrium Y ?

(d) What assumptions in our simple model lead to the results from the previous question? (e) Imagine b = 1. What problems arise?

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a Y C I G Y T but C a by Therefore y a by I G Y T y 1 b b I G Y T y b I G Y ... View the full answer