Question #66480

Consider the following behavioral equations: C = c0 + c1YD, T = t0 + t1Y, YD = Y – T, I = b0 + b1Y, G is constant. Assume that t1 is between 0 and 1.
a. Solve for equilibrium output.
b. What is the multiplier? Explain what the following symbols in the equation stand for. c0, c1, t0, t1, YD, b0 and b1.
c. How will a drop in all C, I and G affect inflation? Illustrate this in DIAGRAM with AD and long-run AS.

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