Question

Consider a model of the Goods Market characterized by the following equations: = C+I+G Y C+I+G с co + c(Y - T) bo+biy G 90 +91Y where bı, C1, 91 are between 0 and 1, and c1 +61 +91 < 1. Assume T is exogenous. I (a) (5 points) Derive the goods market demand curve in terms of the output (Y) and the exogenous variables: Co, C1, bo, b1, 90, 91 and T. Show your work for full credit. (b) (5 points) Draw the Goods Market Equilibrium. Be sure to label all curves, label the equilibrium point, and label the slope of each curve.

Answer 1

(a) Goods market demand cueve : z = C + ] + G =CO+G(8-9) & bot bir+gogy = (lot bot go)+ (a+bi+g)Y-GT [cot borgo-at]+(4+6, +91) (6) Goods market equilibrium: ZEY Z Z-Y z = f(y) slope G+ 6, +gi - E tot botg. at Y* Y (0) At equilibrium: YE = Z :.?=[Corbotgo-at]+(6+6, +9,7 -- [.camma an]* = [con boo * 46 47] Cot borgo-GT 1-(arbitg)

(a) Z = Z E' =f(r)g; g. cooper a bigi) f(T)g, gi (stope=G+ bago Y* * Y Y* In case this as gi nises the slope of z = f(r) nises. This makes the a curve steeper. At equilibrium r* nises. (e) If then at at g, tb, a equilibrium: tot bot go.at Y* = Cot bot go-GT output will be equal to autonomous spending.