Answer to Question #60991 in Macroeconomics for Ahmed
2.Assume the following information represents the National Income Model of a hypothetical economy.
Y = C + I + G,C = a + b(Y – T),T = d + tY, I = I0,G = G0
Where a > 0; 0 < b < 1,d > 0; 0 < t < 1,T = Taxes, I = Investment ,G = Government Expenditure
Explain the economic interpretation of the parameters a,b,d and t.
Find the expression of equilibrium income, consumption and taxes
b – slope of the consumption function;
d – constant autonomous lump-sum tax;
t – rate/proportion of income tax.
An expression, which determines income, consumption and taxes at equilibrium:
Y̅ = 1/1-b x (a - bT + I + G)
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in a certain economy marginal propensity to save is 0.2 and the autonomous consumption is 400
a)formulate consumption function
b)if the government expenditure is to increase were to increase by 50% what would be the resultant change in national income