Question

Given Y= C + Y + G, C = C0 + b Y
I = I0 and G = G0 where C0 = 135,
(i) Find the equation for the equilibrium level of income in the reduced form
(ii) Solve for the equilibrium level of income.

Answer 1

At equilibrium :

X = C

From the question lets do the substitution.

X = C + 75 + 30

C = 135 + 0.8X

i) Lets assume C from the first equation.

C = X - 75 - 30

The equilibrium equation is :

X - 75 - 30 = 135 + 0.8X

ii) Lets solve for X now.

X - 0.8X = 135 + 75 + 30

0.2X = 240

X = 240/0.2

X = 1200

The equilibrium income is 1200