Equilibrium income in the goods market model

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Reference no: EM132471875

Equilibrium income in the goods market model

An economy is described by the following equations:

C = c₀+ c₁Y_D

Y_D= Y - T

I = I (autonomous)

G = G (autonomous)

T = T (autonomous)

a. Define the equilibrium condition and derive the reduced form equation of this model.

b. By how much does Y increase when G increases by one unit?

c. By how much does Y decrease when T increases by one unit?

d. Why are the absolute values of the outcomes under b and c different?

e. Suppose that G and T increase by one unit each. What is the change in equilibrium GDP? Are the 'balanced budget' changes in G and T macroeconomically neutral?

f. How does the specific value of the marginal propensity to consume affect your answer to e)?

Reference no: EM132471875

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