9780070109100, Chapter 3 5, Problem 1E

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Chapter 3.5, Problem 1E Step-by-step solution Step 1 of 4 (a) The model is given by the following equations: = (1) C=a+b(Y-T) (2) (3) Variables that are decided within a model are endogenous variables. In the given model, there are three endogenous variables - Y, C, and T. Step 2 of 4 (b) Find the equilibrium values of the endogenous variables. Substitute equation (3) in equation (2). Substitute the above expression in (1), 1-b(1-t) Step 3 of 4 Now find the equilibrium value of T by substituting the equilibrium value of Y in equation (3). T = 1-b(1-t) T = 1-b(1-t) = 1-b(1-t) Step 4 of 4 Now find the equilibrium value of C by substituting the equilibrium value of Y in equation (1). 1-b(1-t) = 1-b(1-t) = 1-b(1-t) = 1-b(1-t) C* = 1-b(1-t) The equilibrium value of each of the endogenous variables is stated in the solution.