Reference no: EM1314440

This question requires you to solve a macro model algebraically. Reading the appendix to this chapter will help you to answer this question. But, just in case, we lead you through it step by step. The equations for the model are as follows:

i)    C = a + bYn      Consumption

ii)   / = /q                  Investment (autonomous)

iii) G = G₀               Government purchases

(autonomous)

iv) T = tY                Net tax revenue

v)   X = X_u                  Exports (autonomous)

vi)   IM = triY             Imports

a. Step 1: Recall that Y_n = Y-T. Using this fact, sub­stitute the tax function into the consumption func­tion and derive the relationship between desired consumption and national income.

b. Step 2: Sum the four components of desired aggre­gate expenditure (C, I, G, NX). This is the aggre­gate expenditure {AE) function.

c. Step 3: Recall the equilibrium condition, Y = AE. Form the equation Y = AE, where AE is your expression for the AE function from part (b).

d. Step 4: Now collect terms and solve for Y. This is the equilibrium value of national income.

e. Step 5: Suppose the level of autonomous expendi­ture, which we could call A, rises by AA. What is the effect on the level of equilibrium national income?