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

Answer:

Explanation:

i).

$Y=C+I+Gwhere, C=C0+bYSo, Y=C0+bY + I +GY= 135 + bY + I0 + GoSo, Y=(135 + I0 + G0)/1-b$      -------------- Reduced form

For equilibrium we need the values for I0, b and G0.

Substitute them into this reduced form and you will have the equilibrium level of income.