Explanation:
we have consumption function as:
c = c₀ +c₁yd
disposable income yd = y - t
consumption = c₀ + c₁(y - t)
investment i = b₀+ b₁Y
we have G as government spending and t as tax
total spending
Y = C + I +G
such that,
Y = c₀ + c₁(y - t) + B₀ + B₁Y + G
we take all values with y to the left hand side of the equation
y(1 - C₁ - B₁) = C₀+B₀+B₁Y+G
We divide through to get y
[tex]Y = \frac{C0 + B0 + B1Y}{1-C1-B1}[/tex]
b.
the spending multiplier would be 1/1−c1−b1
If C₀, b₀ and tax are held constant, and G goes up by 1 unit then we will have equilibrium output increase by
[tex]\frac{1}{1-c1-b1}[/tex]