Question

The equilibrium level of income in the two-sector fixed-price model is:

Options

• \[Y=\frac{1-c}{\bar{C}+\bar{I}}\]

• \[Y=(\bar{C}+\bar{I})(1-c)\]

• \[Y=\frac{\bar{C}+\bar{I}}{1-c}\]

• \[Y=\frac{\bar{C}-\bar{I}}{1+c}\]

Answer 1

Setting ex ante aggregate demand equal to ex ante aggregate supply gives \[\bar{C}+\bar{I}+cY=Y\], which rearranges to \[Y(1-c)=\bar{C}+\bar{I}\]. Solving for Y gives the equilibrium income \[Y=\frac{\bar{C}+\bar{I}}{1-c}\].