Given α is non-income tax, β is income tax, δ is marginal propensity to consume, γ is autonomous consumption, T (tax), Y (national income), I0 (investment) and G0 (government expenditure).
a) Formulate the equations needed to find the reduced form of equilibrium income (Ye). (10)
b) Do a comparative static to find the effect of income tax, non-income tax and government spending on equilibrium income. (15)
c) Use Cramer’s rule, to find the equilibrium level of income, tax and consumption, for the systems of equations in a). (15)
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