Question

Q. 1 (B) Given Y=C+Y+G, C=Co+bY, I=Io and G=Go Where Co=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 :

Y = C

From the question lets do the substitution.

Y = C + 75 + 30

C = 135 + 0.8Y

i) Lets make C the subject of the equation in the first equation.

C = Y - 75 - 30

The equilibrium equation is :

Y - 75 - 30 = 135 + 0.8Y

ii) Lets solve for y now.

Y - 0.8Y = 135 + 75 + 30

0.2Y = 240

Y = 240/0.2

Y = 1200

The equilibrium income is 1200

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