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Equilibrium income in the goods market model
An economy is described by the following equations:
C = c0+ c1YD
YD= 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)?
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