Question

The equilibrium level of national income in a model with government expenditure, taxes and transfers is given by:

Options

• \[Y^*=(1-c)\left(\overline{C}- cT-c\overline{TR}+I+G\right)\]

• \[Y^*=\frac{1}{c}\left(\overline{C}+ cT-c\overline{TR}+I+G\right)\]

• \[Y^*=\frac{1}{1-c}\left(\overline{C}- cT+c\overline{TR}+I+G\right)\]

• \[Y^*=\frac{1}{1+c}\left(\overline{C}+ cT+c\overline{TR}+I-G\right)\]

Answer 1

Equilibrium income is derived by setting \[Y=AD\] and solving: \[Y^*=\frac{1}{1-c}\left(\overline{C}- cT+c\overline{TR}+I+G\right)\]. Taxes (T) reduce income, while transfers (\[\overline{TR}\]) and government spending (G) raise it, all amplified by the multiplier \[\frac{1}{1-c}\].